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 | WHAT IS AN ANNUITY? |
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An annuity is a contract between the annuitant (you) and a life insurance company. The annuitant purchases the annuity contract from the life insurance company by way of making a lump sum premium payment or a series of payments and in return the life insurance company insures the annuitant will never outlive their retirement savings. Annuities are often bought for safety of principal and future or immediate retirement income. Only an annuity can pay an income that can be guaranteed to last as long as you live. Your money grows tax-deferred in the annuity.
There are two phases during the life of the annuity contract.
"The Accumulation Phase" and "The Payout Phase"
During the accumulation phase the premium you deposit into the annuity contract earns tax-deferred interest. The goal is to accumulate as much principal as possible in the annuity.
Then the annuitant "at any time" can elect to start receiving periodic income payments guaranteed for a certain number of years or for the rest of their life, regardless of how long the person lives. Thus, insuring you will never run out of money during retirement. If you do not need income you can simply allow the account to grow. You are never forced to take an income stream.
If the annuitant dies before or during the payout phase, the insurance company will pay the accumulated value or periodic payments to the named beneficiaries in the contract.
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