According to Ernest & Young Tax Guide, "an Annuity is a contract you invest in and receive a promise from the insurance company to pay a series of payments for a fixed number of years or over a lifetime."

Types of Common Annuities

Fixed Annuity - is an annuity where you give an insurance company a certain amount of money and they (the insurance company) guarantee a rate of return.

Variable Annuity - invests your money in a portfolio of separate accounts that often mirror mutual, stock, or bond funds ( Note theses are not mutual funds, so the returns cannot be looked up in the Wall Street Journal under the mutual fund section.)

Equity Indexed Annuity - is an annuity that guarantees a minimum rate of return and allows you to participate in the returns based on a index such as the S & P 500. However, there may be a cap in regards to how much you can earn such as 10% to 12 % , or your level of participation may be 100% or lower in a given year.

Payment Options of Annuities

Immediate Annuity - you give the insurance company money and they convert it into a lifetime or period-certain income. (Period certain means the company will pay your beneficiary the remaining years if you die within the guaranteed period. e.g. You have a 10 year period-certain annuity but die in five years. The insurance company is required to pay your named beneficiary the remaining five years.

Deferred Annuity - is an annuity where your money is invested, and one day you will receive future payments from the insurance company.

Joint Life Annuity - pays you an income until the first death of an annuitant (An annuitant is anyone who the company is required to pay a life income on).

Joint Life and Survivor Annuity - it pays until the death of the second annuitant. On the death of the first annuitant the second usually receives a reduced amount such as 50%. (Does this sound like your retirement pension?)

Single Premium Annuity - you pay one premium and the insurance company promises to pay you an income in the future. (either deferred or immediate annuity)

Installment Premium Annuity - an annuity where your premiums pay for future payments from the insurance company. (deferred annuity only)

Other Annuity Facts:

10 % penalty if you take out money before 59 1/2.
Death Benefit equals the amount invested - withdraws ( e.g. you invest $100,000 but your account value of the variable annuity is $20,000 at death, due to market loss and their are no withdraws. Your beneficiary is normally entitled to $100,000 not $20,000)
Earnings grow on a tax-deferred basis
If you are not the spouse of the deceased, you may have five years to dissolve an inherited annuity or one year to turn it into an immediate annuity
First Variable Annuity used in the U.S. was by TIAA-CREF.

The variable annuity has its benefits. It offers diversification when limited dollars are available, and can be used to fund many types of retirement plans including the 403B. Generally, a qualified variable annuity has the same early withdraw penalties and exceptions as any other qualified mutual fund plan. The death benefit is what separates a variable annuity from any other investment.

*Disclaimer: Always consult a tax advisor or financial advisor when making investment decisions.

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