How Do Annuities Work?

How do annuities work? Let’s talk about the basics!

What is an annuity?

An annuity is a contract between a person and a financial institution. You give them money, and they promise to provide you with a future stream of income.

How Do Annuities Work?

Step 1: Purchase the Annuity

You purchase the annuity contract through an insurance company or another financial institution with either one lump sum or a payment plan. You can purchase annuities from:

• Brokerage firms
• Banks
• Mutual fund companies
• Insurance Companies

Step 2: Your Contributions are Invested

The insurance company invests money from your purchase in various ways. Depending on the type of annuity you purchase, you could actually see some return on that investment. A variable annuity would give you a larger payout if the markets do well. But, a fixed annuity carries less risk, as its payout does not depend on the markets.

Step 3: Receive Your Payouts in the Future

Depending on the terms of your contract, annuities begin paying out on a future specified date. As the terms probably already imply, an immediate annuity pays immediately, and a deferred annuity pays much later on.

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