The Advisor Insights question and answers can be found on Investopedia here.

Question Headline:

What is an annuity?

Answer: 

An annuity is a sum of cash invested to produce a flow of money for a fixed period. To simplify, an annuity is money invested with an agent or broker, that grows over time. The owner of the annuity will receive payments from the annuity company for a period of time, typically for life. There are two types of annuities, immediate or deferred annuities. An immediate annuity is when someone makes an initial  principle payment and begins receiving a fixed payment for life, immediately. With a deferred annuity, the investor doesn’t start receiving payments until a later, specified date, determined by the investor.  Annuities are tax deferred, making this investing vehicle important for people looking to save for retirement. There is often a conflict of interest between investors and agents concerning annuities. Agents/brokers selling annuities are paid commission at the point of sale, which tends to encourage the agent to sell annuities even if they are not appropriate for the investor. The lack of liquidity is also a downfall. If people are in a bind for money and their money is in an annuity, they could face penalties for having to withdraw their money early. Annuities are taxed at the ordinary income tax rate, and not the lower long-term capital gains rate like most investments. In summary, there are unique situations where annuities can be useful, however in most circumstances there are better investment options which provide better returns and more liquidity to investors.

– Wyatt Swartz

– Contributions by Caitlin Lammers

– 7/19/2017