A life insurance annuity is an investment tool that is principally sold by insurance companies. There are several types of annuities that exist; however, they all have the same two basic properties:

1. Whether or not the payout is a deferred one or immediate
2. Whether the returns are variable or fixed

Fixed Annuities

The basic idea of a fixed annuity is that an amount of money is given to the insurance company and in return for that money they agree to pay you a fixed amount for a certain timeframe.

If the purchase was made as a single premium immediate annuity that means the payout will begin immediately. On the flip side if the purchase was made for a premium deferred annuity the payment will begin at a time of your choosing. An example of this is say your retirement.

The annuity vehicle is something that can be used for a tax deferred investment or can be looked at for taking a lump sum amount into a steady stream of income.

There is the ability to annuitize. In order to do so it means that you’re telling the insurance company that you want to receive payments until your death and once that time has elapsed those that you leave behind do not get anything back. In this example it could be from 1 year to 50 years and they will be exactly the same so long as the company stays in business and will stop immediately upon the death of the investor.

Variable Annuities

The variable annuity is basically an insurance contract that’s joined at the hip along with an investment product. The variable annuity is an investment vehicle designed to drive a retirement savings.

The variable annuity is basically a boxed underlying investment that’s most characteristically in a very controlled set of mutual funds. The main benefit to a variable annuity is that those underlying investments have the ability to grow at a tax deferred basis. This means that no matter what the gains from the annuity nothing will be taxed until any money is withdrawn.

When you come upon retirement there is the ability to have the annuity pay an income, depending on how well the investment has performed and for the rest of your lifetime. The insurance portion is going to potentially provide some certain investment guarantees as well. For example, the guarantee that the full amount that was originally contributed to the account is going to be paid out upon the death of the account holder even should the market value be low at that time.

The variable annuity is something that can be really attractive to someone that makes a very large amount of money and is getting into the retirement idea very late in the game and allows them to save aggressively for their retirement.

The one consideration that you need to make is that if you’re a young person you should be sure to fund any of your IRA plans and any 401k plans that you have through your employer before you turn to a variable annuity.