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ANNUITY INSURANCE

An annuity is an insurance contract. An annuity contract is created when an individual gives the insurance company money which may grow tax deferred and then can be distributed back to the owner in several ways. The defining characteristic of any and all annuity contracts is the option for a guaranteed distribution of income until the death of the person or persons named in the contract. Perhaps confusingly, the majority of modern annuity customers in fact only use them to accumulate funds and then perform lump sum withdrawals without using the guaranteed income for life feature which is the defining characteristic of an annuity.

General

Annuity contracts in the United States are defined by the Internal Revenue Code and regulated by the individual states. Annuities have features of life insurance and investement products. In the US, annuity contracts are only allowed to be sold by insurance companies although private annuity contracts may be arranged between donors to non-profits to reduce taxes. Insurance companies are regulated by the states, so contracts or options that may be available in some states may not be available in others. However, their tax treatment is dictated by the Internal Revenue Code. There are two possible phases for an annuity, one phase where the customer deposits and accumulates money into the account, and the annuity phase where the insurance company pays income until the death of the customers named in the contract. The first phase has come to be named a "deferred annuity" as if it was a distinct product, while the second phase has been called an "immediate annuity", even though any annuity by definition must have the option for both phases.

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