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Understand the Type of Annuity You Are Purchasing

Recent economic times have left investors searching for ways to recoup their losses and generate decent returns. Many have considered parking investment dollars in annuities. Understanding the different types of annuities is critical before making an investment decision.

The Financial Industry Regulatory Authority (FINRA) defines an annuity as, "a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time." It is a distribution of money earned on an investment on a set schedule that could include quarterly, bi-annual, or yearly distributions.

There are several types of annuities available, which are described below:

  • A deferred annuity gives you the opportunity to have your investment grow tax-deferred until the day you withdraw the money or convert it into an income stream.
  • With a deferred variable annuity, you can invest your money in "sub-accounts." The gains on the annuity are tax-deferred until the money is taken out or annuitized.
  • Indexed annuity generates returns on your contributions (based on a market index).
  • With an immediate annuity, transform a lump-sum amount into a lifetime income stream.

There are specific benefits and risks to the various annuities. It is important that you fully understand an annuity before investing your money.

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