{"id":14296,"date":"2025-02-25T14:49:39","date_gmt":"2025-02-25T20:49:39","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=14296"},"modified":"2025-02-25T14:49:40","modified_gmt":"2025-02-25T20:49:40","slug":"how-do-annuities-work","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/finance\/how-do-annuities-work.html","title":{"rendered":"How do annuities work?"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. <\/em>See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

Quick Answer:<\/strong> Annuities are financial products you buy, usually from insurance companies, to provide a steady stream of income over time. You pay a lump sum or make payments, and in return you receive regular payouts, often during retirement, to help cover expenses and ensure financial stability.<\/p>\n\n\n\n

Most people know about 401(k)s and IRAs, but many other options for retirement planning and wealth-building are available. Annuities are a popular financial product that can be helpful in retirement, but they come with some potential downsides.<\/p>\n\n\n\n

So, how do annuities work? Keep reading to learn more about annuities and understand whether this option is right for you.<\/p>\n\n\n\n

What is an annuity?<\/strong><\/strong><\/h2>\n\n\n\n

Annuities are a type of insurance product, but instead of insuring yourself or your property against potential future losses, annuities let you insure income. Specifically, they help ensure you\u2019ll receive an agreed-upon amount of money periodically at some point in the future, which makes them a popular option for retirement planning<\/a>.\u00a0<\/p>\n\n\n\n

\"Annuities<\/figure>\n\n\n\n

Annuities can be immediate or deferred, as well as fixed, variable or indexed. They’re typically sold by banks, brokers, investment companies and life insurance companies. <\/p>\n\n\n\n

The basic concept behind annuities is that you purchase a product now, which you pay for upfront or by making ongoing payments – sometimes in the form of insurance premiums – over a period of years.<\/p>\n\n\n\n

How are annuities paid?<\/strong><\/h2>\n\n\n\n

Depending on the annuity product you purchase, you can receive payments for a certain period or for the rest of your life once the annuity payout begins. Those payments typically come periodically, such as monthly, quarterly or annually.<\/p>\n\n\n\n

You can also choose immediate annuities that begin payouts as soon as you successfully sign up. <\/p>\n\n\n\n

Generally speaking, you can safely expect to get back more in annuity payments than you pay into the product. That\u2019s why they\u2019re considered an investment.<\/p>\n\n\n\n

This is because your annuity purchase price or payments are put into a collective fund with all other payments being made by annuity customers for that product. Those funds are invested, and the earnings over time result in a profit for you and the provider.<\/p>\n\n\n\n

The main types of annuities<\/strong><\/strong><\/h2>\n\n\n\n

How much you can earn, when and how it pays out, and the risk associated with your investment all depend on what type of annuity you buy. The types of annuities are summarized below:<\/p>\n\n\n\n

Deferred annuities versus immediate annuities<\/strong><\/strong><\/h3>\n\n\n\n

The first major decision to make when purchasing an annuity is whether you want a deferred or an immediate annuity.<\/p>\n\n\n\n

Immediate annuities<\/strong> are good for people who want income right away, like retirees. You pay a lump sum, and the payouts start almost immediately, helping cover living expenses.<\/p>\n\n\n\n

Deferred annuities<\/strong> are better for people saving for the future. You invest money now, let it grow over time, and receive payouts later, often during retirement.<\/p>\n\n\n\n

Three categories of annuities<\/strong><\/strong><\/h2>\n\n\n\n

Once you decide when you want your payouts to begin, you\u2019ll need to pick a more specific type of annuity to invest in. Both immediate and deferred annuities have three major categories, which are outlined below.<\/p>\n\n\n\n

1. Fixed annuities<\/h3>\n\n\n\n

Fixed annuities pay out an agreed-upon, guaranteed amount each time you receive income.<\/p>\n\n\n\n

Pros:<\/p>\n\n\n\n