Mint Money Knowledge Center: What is an annuity?

What is an annuitySeveral types of annuities exist. Consumers can purchase property on an annuity, which means the buyer pays installments until he or she reaches the purchase price. It is also possible to invest in an annuity, which represents an insurance product that pays out income to the investor.

Why Invest in an Annuity?

Most investors use annuities as part of their retirement plans. They place a certain amount of money in the annuity as investors, then establish a timetable for payments. Many annuity investors elect to receive payments for the rest of their lives.

The money invested in an annuity is not subject to tax. Consequently, the income derived from annuity payments is taxed just like any other form of income. Additionally, it's a relatively simple and low-risk investment.

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What Type of Annuity is Best?

Some investors opt for deferred annuities. These investments begin to pay out income at a predetermined date, such as the year the investor wishes to retire.

Immediate annuities, on the other hand, pay out immediately, according to CNN Money. They work best for investors who have already retired.

Are There Any Drawbacks to Annuities?

Annuities often incur high fees for maintenance and management. This reduces the income potential. However, most annuities receive life insurance protection, which makes them a safer option than stocks.

Annuities represent just one investment option for retirees.

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