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Annuities are essentially insurance policies
with a twist. While life insurance pays a death benefit and protects from the
risk of dying prematurely, annuities' distinction is that they can insure a
source of income for as long as a person lives; annuities protect from the risk
of outliving one's assets. The other attractive aspect of annuities is that
their values grow on a tax-deferred basis. An annuity is an insurance contract
and can be offered only by a licensed insurance agent.
There are two basic kinds of annuities.
annuities are based on both guaranteed and current interest rates that are
declared. The value of a fixed annuity can never fluctuate downward.
? Variable annuities build value based on the
performance of the underlying investments in the fund, which are not guaranteed.
The values will fluctuate with market conditions. Annuities are
popular with some people because they provide tax-deferred savings with
guaranteed life-income options. Unless an annuity is part of an IRA or
employer-sponsored, tax-qualified retirement plan, your contributions to it are
not pre-tax or tax-deductible, so you may miss out on some of the tax savings
offered by the other plans we have discussed. Such an annuity is called a
You now have a good idea of how tax deferral works. Let's