To receive a deferred annuity, you must pay a premium, usually a large lump sum, which the insurance company invests. After a certain period of time, the client begins to receive payments for a set period or for life.
There are different types of annuities, which differ in how your money is invested and the level of risk they carry.
Fixed annuities: money is placed in a general account of insurance company with a guaranteed minimum interest rate and fixed payments. Risks are low, but returns are limited.
Variable annuities: money is invested in various assets, such as stocks, bonds, and their returns depend on the results of these investments. The risk is higher, but the potential profit is also higher.
Indexation annuities: return depends on stock index, such as the S&P 500.
The pros of such products include several advantages. In particular, contributions and investment return are not taxed until you start receiving payouts. Annuities help reduce market risk and protect retirement savings. If the annuity holder dies, their beneficiaries can receive distributions.
Deferred annuities have their drawbacks as well. For example, annuities can include high fees, and it reduces long-term return potential. Payouts are subject to income tax, and there is a 10% penalty for early withdrawals before the age of 59½.
Annuities can be useful for those seeking guaranteed retirement income, but it is vital to weigh the costs and benefits before purchasing.
Source: https://www.businessinsider.com/personal-finance/investing/what-is-an-annuity
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