Annuities

Contracts that convert a sum of money into a stream of income, often guaranteed for life.

Overview

Immediate annuities start paying at once while deferred annuities accumulate first. Fixed annuities credit a guaranteed rate, variable annuities invest in subaccounts, and indexed annuities link returns to a market index subject to caps and participation limits. Lifetime annuitization transfers longevity risk, the danger of outliving savings, to the insurer, which pools mortality across many buyers. Costs can be high, variable annuity fees often exceed 2 percent a year, and inflation erodes fixed payments unless riders are purchased. In the United States growth is tax deferred inside the contract, which is why annuities mostly sit in retirement planning and suit buyers who prioritize guaranteed income over flexibility or leaving money to heirs.