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What Is an Annuity?

An annuity is a financial instrument that has similarities to a savings account or a CD. This type of financial instrument is created when you contract with an insurance company to deposit an amount of money in an annuity fund. The money you deposit in the annuity earns interest over time, which is untaxed. If you want to withdraw money from your annuity, you will have to pay a penalty fee.

Then, at a time specified in the future, the insurance company will begin making regular payments to you for as long as your annuity contract states. At the time of payment, the interest you earned will be taxed.

Types of Annuities

There are three common types of annuities:

  • Fixed Annuity - You earn a fixed amount of interest over the course of your annuity. Earnings do not vary with the stock market or economic conditions.
  • Variable Annuity - Your money is invested into various securities, such as stocks and bonds. Earnings vary with the market, which will affect the value of your annuity.
  • Equity Indexed Annuity - Your money is invested into an index of stocks, such as the Dow Jones Stock Index or the S&P 500. This way, your earnings vary with the whole market as opposed to individual stocks. Earnings do vary more than with a fixed annuity, but less than with a variable annuity.

What Happens to My Annuity When I Die?

If you die before your annuity starts paying out, then your beneficiary can either receive the cash value of the annuity or take over your payments. Your contract will determine what happens if you die after your annuity has started to pay out.

Do I Need an Attorney to Advise Me on My Annuity Problem?

If you or your beneficiary has a conflict with the insurance company that sold you your annuity, you may need to go to court. Understanding your annuity contract and laws relating to it can be very difficult. A qualified attorney will have an easier time explaining to you exactly what your annuity contract means for you and your loved ones. Additionally, an attorney knows your state's laws and has experience dealing with insurance companies.

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Photo of page author Kristen Johnson

, LegalMatch Legal Writer

Last Modified: 03-22-2018 10:29 PM PDT

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