Annuities

An annuity is the mirror image of life insurance. Life insurance protects against dying too soon; an annuity protects against living too long (outliving your money) by converting a sum into an income stream. Sold under the Life line. All STABLE.

Two phases

Accumulation phase — money is paid in (lump sum or periodic) and grows tax-deferred.
Annuitization / payout phase — the accumulated value is converted into income payments.

By how you fund it / when it pays

Immediate annuity — funded by a single premium; payouts begin almost right away (within ~a year). Used to turn a lump sum into income now.
Deferred annuity — accumulates first; payouts begin later. Can be single- premium or flexible-premium.

By how the value grows

Fixed annuity — guaranteed minimum interest rate; the insurer bears investment risk; predictable.
Variable annuity — value tied to separate-account subaccounts; the owner bears investment risk; requires FINRA registration to sell (like variable life). See 01 Life policy types.
Indexed (fixed-indexed) annuity — interest credited based on a market index (e.g., S&P 500) with a floor and a cap/participation rate; a middle ground.

Payout options

Life only (straight life) — income for life; stops at death (highest payment, no refund).
Life with period certain — life income, but guaranteed for at least N years to a beneficiary.
Life with refund (cash/installment) — guarantees at least the principal is paid out.
Joint and survivor — continues (often reduced) to a surviving annuitant.

Parties to an annuity

Owner (controls it), annuitant (whose life the payout is measured on), beneficiary (receives remaining value at death). Often the same person owns and annuitizes.

Taxation (framework only)

Growth is tax-deferred during accumulation.
On payout, the earnings portion is taxable as ordinary income; the principal (basis) is not (the exclusion ratio splits each payment).
Withdrawals before age 59½ may incur a tax penalty.

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