Annuity FAQs What is an annuity? An annuity is a contract between an individual and an insurance company in which the individual makes a lump sum payment or series of payments. In exchange for the payments, the insurer agrees to provide the individual with regular income, starting immediately or in the future. How does an annuity work? Annuities provide regular income payments in exchange for your lump sum or a series of payments. Immediate annuity payments begin right away, while deferred annuities allow money to grow tax-deferred before payments start. What are the advantages of investing in annuities? Annuities offer advantages such as guaranteed regular income, tax-deferred growth, and personalized features. What are the disadvantages of investing in annuities? Annuities have a few disadvantages, including expensive annual fees, high commission rates, and early withdrawal penalty fees. What are the three types of annuities? The three types of annuities are fixed, variable, and indexed. Fixed annuities pay out a fixed amount, while variable annuities offer a variable return on investment based on the performance of the annuity's underlying portfolio. Indexed annuities fall somewhere in the middle because they provide a guaranteed minimum payment, but part of the pay-out is also tied to the performance of an index. About the Author True Tamplin, BSc, CEPF® Facebook Linkedin Instagram Twitter Youtube True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists. True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics. To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.