An annuity is a financial product that provides you with a guaranteed regular income. Typically, it’s used during your retirement and sold by an annuity provider, like a life insurance company. You can buy an annuity with a lump sum or through multiple payments over time.
What are Annuities?
Annuities are used for retirement purposes and help individuals address the risk of outliving their savings. An annuity is a long-term investment that is issued by an insurance company and is designed to help protect you from the risk of outliving your income. You pay a set amount of money today, or over time, in exchange for a lump-sum payment or stream of income in the future.
Is an Annuity a Worthwhile Investment?
Annuities are a promising investment for people wanting a reliable income stream during retirement. Annuities are insurance products, not equity investments with high growth. This makes annuities a good balance to a financial portfolio for someone near or in retirement. Annuities can be structured into various kinds of instruments, which gives investors flexibility.
How an Annuity Works
Annuities are designed to provide a steady cash flow for people during their retirement years and to alleviate the fears of outliving their assets. Immediate annuities are often purchased by people of any age who have received a large lump sum of money, such as a settlement or lottery win, and who prefer to exchange it for cash flows into the future. Because invested cash is illiquid and subject to withdrawal penalties, it isn’t recommended for younger individuals or those with liquidity needs to use this financial product.
Annuities vs. Life Insurance
Life insurance is bought to deal with mortality risk, which is the risk of dying prematurely. Policyholders pay an annual premium to the insurance company that will pay out a lump sum upon their death. If the policyholder dies prematurely, the insurer pays out the death benefit at a net loss to the company. Annuities, on the other hand, deal with longevity risk, or the risk of outliving one’s assets.
