Offered by an insurance company, an annuity is a tax-advantaged product where long term financial requirements can be answered better than many other financial alternatives. An annuity is a contract providing for the systematic liquidation of principal and interest in the form of a series of payments for a fixed period or over the life of the annuitant. In return for cash, the insurance company agrees to pay someone (generally the annuitant) a stipulated sum (the annuity) periodically.

A life annuity is one in which the continuation of payment is contingent upon the continuing existence of one or more lives. The consideration (premium) paid for the annuity is fully earned by the insurer immediately upon the death of the annuitant. Therefore, each payment represents principal, interest, and a survivorship element. The life annuity promises that as long as the annuitant lives, payments will continue, and the income stream can never be outlived.

Annuities are classified in terms of:

1. Method of Paying Premiums:
    a. Single Premium
    b. Fixed Annual Premium
    c. Flexible Premium

2. Date Benefits Begin:
    a. Immediate
    b. Deferred

3. Number of Lives:
    a. Single Life
    b. Joint Life

Two major types of annuities being sold today are the fixed annuity and the variable annuity:

Fixed Annuity
The annuitant is paid a fixed rate, which is guaranteed for a certain time. After that time, the payment depends on the insurer's financial department's success (subject to a guaranteed floor, typically about 4%).

Variable Rate Annuity
These are currently very popular because, in return for the assumption of greater risk, the contract owner may obtain both greater flexibility and a higher return. The contract owner can select from among a number of mutual fund investments such as a mix of stock, bond, and money market funds.

Safe Alternative
The annuity value is backed by the general assets of the insurer which issues the annuity. It is designed as a safe way "to accumulate" dollars on a tax-advantaged basis. Due to it's designation as a life insurance product, annuity funds avoid probate when the death benefit is to be paid to a beneficiary.

Types of Dollars Going Into the Annuity
Maturing CD's, Treasury bills, money markets, passbook savings, and any other funds.

When should you purchase an Annuity:

1. When safety of principal is a paramount consideration. This is particularly important for retirement planning.
2. When a tax deferred accumulation of interest is desired. The interest earned inside an annuity owned by an individual grows income tax free and is not taxed until it is withdrawn.
3. When you want a guarantee that a given level of interest will be credited to his investment for a long period of time. Many companies offer guaranteed minimum rates of return.
4. When liquidity is desired.
5. When an investment with immediate and high collateral value is wanted.
6. When you want a retirement income that can never be outlived.
7. When you would like to avoid probate and pass a large sum of money by contract to an heir to reduce the possibility of a will contest.
8. When a conservative complement to other investment vehicles is desired.