I'm confused – is an annuity an investment vehicle or an insurance policy?
Answer:
An annuity is a distinctive financial product. Although it's not an insurance policy per se, it is a contract with an insurance company. Many different types of annuities exist, with many different features. A deferred annuity is a savings vehicle that accumulates earnings on a tax-deferred basis. An immediate annuity is a financial instrument that converts a lump-sum premium into a stream of payments over a certain period of time or for as long as the annuitant lives.
Here's how it works. You (the annuitant) pay cash to an annuity issuer (the insurance company) for either a deferred or an immediate annuity, which will accumulate earnings at a fixed interest rate (a fixed annuity) or a variable rate determined by the growth (or losses) in investment options known as subaccounts (a variable annuity). With a deferred annuity, you (or the beneficiary you chose) can receive the principal and earnings in one lump sum when the contract is surrendered (i.e., cashed in). With an immediate annuity, you (or your beneficiary) receive the principal and earnings over a predetermined period of time.
An annuity may have certain guaranteed or insurance-like characteristics. (Guarantees are based on the claims-paying ability of the issuing insurance company.) For example, a deferred variable annuity may guarantee that your beneficiary will receive at least the amount of your original principal if you die, even if the value of the annuity has declined due to poor performance of the subaccounts you selected. And whether you purchase a fixed or variable immediate annuity (or if you've chosen to annuitize a deferred annuity), you're guaranteed to receive payments for life if you elected that payout option, no matter how long you live.
Deferred annuities are most commonly used to help save for retirement. Immediate annuities are generally used to provide a guaranteed income during retirement.
GE 37916 (03/07)
Guarantees are based on the claims paying ability of the issuing insurance company.
Annuities are long-term financial products designed for retirement purposes. In essence, annuities are contractual agreements in which payment(s) is made to an insurance company, which agrees to pay out an income or a lump sum amount at a later date. There are contract limitations and fees and charges associated with annuities, which include, but are not limited to, mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits. Amounts in a variable annuity's investment portfolios are subject to fluctuation in value and market risk, including loss of principal. Your financial professional can provide cost information and complete details.
Withdrawals from annuities and IRAs are subject to normal income tax treatment and if taken prior to age 59-1/2 may be subject to an additional 10% federal income tax penalty. Withdrawals from annuities may also be subject to a contractual withdrawal charge.
Please consider the charges, risks, expenses and investment objectives carefully before purchasing a variable annuity. For a prospectus containing this and other information, please contact your financial professional. Read it carefully before you invest or send money.
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