"What is an 'Annuity?'"
"An annuity is a contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase."
"BREAKING DOWN 'Annuity'
"Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk, or outliving one's assets.
Annuities can also be created to turn a substantial lump sum into a steady cash flow, such as for winners of large cash settlements from a lawsuit or from winning the lottery.
"Types of Annuities"
“Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits.
Annuities can be structured generally as either fixed or variable. Fixed annuities provide regular periodic payments to the annuitant.
Variable annuities … “ (Editors Note: Variable annuities will be addressed separately.)
" ... ... ... One criticism of annuities is that they are illiquid. Deposits into annuity contracts are typically locked up for a period of time, known as the surrender period, where the annuitant would incur a penalty if all or part of that money were touched. These surrender periods can last anywhere from 2 to more than 10 years, depending on the particular product. Surrender fees can start out at 10% or more and the penalty typically declines annually over the surrender period."
" … … …Other riders may be purchased to add a death benefit to the contract or accelerate payouts if the annuity holder is diagnosed with a terminal illness. Cost of living riders are common to adjust the annual base cash flows for inflation based on changes in the CPI."
"Who Sells Annuities"
"Life insurance companies and investment companies are the two sorts of financial institutions offering annuity products. For life insurance companies, annuities are a natural hedge for their insurance products. Life insurance is bought to deal with mortality risk – that is, the risk of dying prematurely. Policyholders pay an annual premium to the insurance company who will pay out a lump sum upon their death. If policyholders die prematurely, the insurer will pay out the death benefit at a net loss to the company. Actuarial science and claims experience allows these insurance companies to price their policies so that on average insurance purchasers will live long enough so that the insurer earns a profit. Annuities, on the other hand, deal with longevity risk, or the risk of outliving ones assets. The risk to the issuer of the annuity is that annuity holders will live outlive their initial investment. Annuity issuers may hedge longevity risk by selling annuities to customers with a higher risk of premature death."
Agents or brokers selling annuities need to hold a state-issued life insurance license … ... ... These agents or brokers typically earn a commission based on the notional value of the annuity contract."
NB.The source of all of the material above is ...
The source of the material below is noted at the end ...
"Retirement income review: GLWB / GMWB
(MoneyWatch) Several insurance companies ... ... now offer hybrid products that combine the best features of managed payouts with the guarantee of a lifetime retirement income. These products are known as a "guaranteed lifetime withdrawal benefit" or "guaranteed minimum withdrawal benefit," but for simplicity's sake let's refer to them as GLWB plans. …
… if you invest in these products, you can withdraw the remaining part of your retirement savings at any time, even after your retirement income starts, unlike conventional immediate annuities."