gif (1280 bytes) Q. How do annuities work?
A. The annuity, in essence, is insurance against “living too long.” In contrast, traditional life insurance guards against “dying too soon.” Here is a summary of how annuities function. An investor hands over funds to an insurance company. The insurer invests the funds. At the end of the annuity s term, the insurer pays the investor his or her investment plus the earnings. The amount paid at maturity may be a lump sum or an annuity a set of periodic payments that are guaranteed as to amount and payment period. The earnings that occur during the term of the annuity are tax-deferred. The investor is not taxed on them until the amounts are paid out. Because of the tax deferral, your funds have the chance to grow more quickly than they would in a taxable investment.
