How Does an Annuity Work?

Understanding the Basics of Annuities
We Can Help You Answer:

What is an Annuity?

An annuity is an insurance policy that can help provide a steady stream of income in retirement. There are several types of annuities. They can either be fixed or variable. Each annuity offers features that may help you achieve your financial goals for retirement. 

How Does an Annuity Work?

To answer the question of “How does an annuity work?”, let’s look specifically at fixed index annuities. FIAs are tax-deferred, have higher interest growth potential, and have less risk than a variable annuity.

An FIA is based on the performance of an underlying index, such as the S&P 500. Therefore, they offer some of the benefits of index funds but are not directly linked to an index. This is because an FIA is an insurance policy and not an investment. So, fixed index annuities are generally protected against loss of principal, even when the market declines. 

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Annuities Have Two Phases

There are two stages to annuity contracts. While each type of annuity is different, these two phases apply to all annuities. The two main phases are accumulation and distribution. How does an annuity work in these 2 phases? 

About Annuities and Taxes

Your money grows tax-free as it accumulates. You pay taxes once withdrawals are made. Taxes are owed only at this time. This is a very useful tool if you want to reduce your current tax liability.

Contact us to learn more about “How does an annuity work?”.

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