In its most basic form, an annuity is an agreement between you and an insurance company. You agree to give them a certain amount of money, and they agree to pay you back with a certain growth over a certain period of time.
The accumulation stage is the period when you contribute to the annuity, and the insurance company applies the agreed growth. This can be a one-time premium – you make one large contribution, or it can be periodic payments – regular or flexible contributions over time. This is also the time when the insurance company updates the value of your account based on the terms agreed in the contract.
Annuitization is a point in time (often retirement) when the insurance company calculates how much of a benefit it has built through the accumulation stage and begins the payout stage.
The payment stage is the period of time in which the insurance company pays you the agreed-upon payout. The amount you receive is based on your accumulated value and the payout options you select. A straight life option generally provides the highest monthly benefit and income provided until the annuitant dies. A joint life option provides a lower monthly benefit because it provides income until the annuitant’s death and the death of his or her spouse. A guaranteed term life option reduces the monthly benefit but guarantees income for a certain number of years, even if the annuitant dies. If the benefit is adjusted for inflation each year, the initial payment is lower, but it will grow over time and inflation.
Annuity options vary widely and are defined by the contract you sign. As a result, it is important to read and understand the contract before purchasing an annuity.
