An annuity is a contract in which an insurance company makes a series of payments to you at regular intervals in return for a premium. Annuities are often bought for future retirement income. The proceeds from an annuity can provide you with an income for life, or for a specified period of time. There are two basic types of annuities:
The first is when you pay a lump sum to an insurance company and they start to pay it out to you right away in periodic installments. This type is known as an immediate annuity - the payments to you start immediately.
The second, and more common, is where money paid by you accumulates interest over a period of time. If you choose this type of annuity, the principal and accumulated amounts will then be paid out to you in periodic installments, usually when you retire, in order to supplement your retirement income. This type is known as a deferred annuity - the payments to you are deferred for a number of years. Currently, a deferred annuity may have tax advantages in that income tax is not owed until you start receiving distributions from the annuity.
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