12 Annuity Terms Every Investor Should Know

SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.

Annuities it can be a good option for investors seeking a steady income during retirement. To begin with, it is important to learn some basic annuity terms. These 12 key terms will help you understand how annuities work and whether they fit into your retirement plan. A financial advisor it can also help you evaluate an annuity contract for your retirement planning needs.

An annuity is a financial product that provides a steady stream of income, often used for retirement planning.

When you buy an annuity, you contribute money to an insurance company, which agrees to make periodic payments in the future. These payments can be adjusted to suit your needs, making annuities a reliable way to secure income and stretch your retirement savings.

There are three main types of annuities:

• Fixed annuities provide guaranteed payments for predictable income.

• Variable annuities let you invest in funds, with payouts dependent on investment performance.

• Indexed annuities link returns to a stock market index and offer some protection against market losses.

Annuities come with benefits such as guaranteed income and potential tax advantages but there are also disadvantages. Most notably, fees can vary widely and affect your returns, and contracts can offer limited liquidity.

If you are considering an annuity as part of your retirement plan, these 12 common terms can help you understand how annuity contracts work:

1. They nod: The annuitant is the person whose life expectancy determines the annuity payments. Their age and life expectancy are used to calculate the payment amounts and they usually receive the income from the annuity.

1. Beneficiary: a beneficiary is the person or entity chosen to receive any remaining annuity benefits after the annuitant's death. Naming a beneficiary allows the value of the annuity to be distributed according to your plans.

1. Accumulation period: This is the period when you contribute to the annuity. During this period, your contributions will grow tax-deferred, allowing the investment to increase in value before payments begin.

1. Distribution period: The distribution stage, also known as the payment stage, is when the annuity begins to provide income to the annuitant. Payments can be structured as a lump sum or regular installments over a set period.

1. Surrender charge: a surrender charge is a fee for withdrawing money from an annuity before a certain time. Knowing these charges can help you avoid unexpected costs if you access your money early.

Story Continues

1. Knight: Riders are optional additions to an annuity contract that customize it to your needs. Common examples include guaranteed lifetime weaning benefits and long-term care coverage.

1. Fixed annuities vs: Fixed annuities provide guaranteed payments, while variable annuities have payments that change based on investment performance. Your choice depends on your risk tolerance and financial goals.

1. Tax deferred growth: Annuities grow tax-deferred until you withdraw money, allowing your investment to grow more over time.
   

2. Mortality risk charge and costs: This fee covers the insurance company's risk of guaranteeing lifetime income and is usually part of variable annuities.
   

3. Guaranteed minimum withdrawal benefit (GMWB): Guarantees minimum withdrawal regardless of market performance. This feature provides a safety net for annuities.
   

4. Immediate annuity: Begins payments shortly after paying a lump sum to the insurer. Direct annuities are suitable for individuals who need immediate income.
   

5. Life annuity: Provides payments for the life of the annuitant, offering income that lasts as long as he lives. This type of contract can help address concerns about the allocation of financial resources.

Annuities provide a steady stream of income, but understanding the terms can be challenging. Key terms such as “deferred annuity” and “immediate annuity” determine when payments start. “Deferred annuities” let your investment grow tax-deferred until you withdraw, while “immediate annuities” start payments soon after a lump sum is invested. For more clarity, consider talking to a certified retirement financial advisor (CRFA).

• A financial advisor It can help you manage your nest egg to reduce retirement taxes and maximize income. Finding a financial advisor doesn't have to be difficult. SmartAsset's free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory call with your match advisor to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, start now.

• Mandatory distributions from tax-deferred retirement accounts can complicate your tax planning after retirement. SmartAsset is RMD calculator help estimate your required classes.

Photo credit: ©iStock.com/Mariia Vitkovska, ©iStock.com/milan2099, ©iStock.com/Vadym Pastukh

The post 12 Annuity Terms Every Investor Should Know appeared first SmartReads by SmartAsset.