An income annuity is a type of guaranteed investment that provides a steady stream of fixed income.
Retirement means losing the regularity of work income. Retirement investments can generate steady income but are subject to market ups and downs and, potentially, periods of lower income.
An income annuity solves this problem by providing a fixed amount of guaranteed periodic income. It is usually purchased at retirement for a lump sum.
What if you could pay someone now to provide you a paycheck that lasts for a number of years or, perhaps, until you die?
That’s what an annuity does.
While this is a very broad term, an income annuity simply refers to an annuity that provides that income stream. Life insurance companies sell annuity contracts, then take the cash and invest it.
Essentially, the insurance company is taking on the risk of your life lasting longer than their actuarial tables predict. By purchasing an annuity, the retiree transfers that longevity risk to the insurer.
It can be an immediate annuity, which means the income starts right away. Or an it could be a deferred annuity, which means the income starts a number of months or years later.
A tax-deferred annuity is the opposite of an income annuity. That type of annuity has no income benefit at all.
Instead, it provides a death benefit and tax deferral.
Investors afraid of the ups and downs of the stock market and who need a guaranteed income stream might consider an income annuity.
However, the buyer should understand that investment growth potential will be stunted by limitations of the annuity contract.
The types of investments offered within the annuity is one such limitation.
There also can be costs, penalties and caps on growth potential, among other caveats.
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