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A fixed stream of cash flows that ends after a specified number of years is called an annuity.
An annuity is a legal agreement between you and an insurance company under which you make a single payment or a series of payments in exchange for regular payments that could start right away or at some point in the future.
- Insurance contracts known as annuities make a guarantee to provide you with consistent income, either now or in the future.
- A deferred annuity has two phases: accumulation and payout (annuitization). An immediate annuity turns a large sum into regular payments right away.
- An annuity can be purchased with a single payment or a series of instalments made over time.
- There are three primary types of annuities: fixed, variable, and indexed. Each has a different level of risk and possible payout.
- Annuity income is often taxed at standard income tax rates rather than long-term capital gains rates, which are typically lower.
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