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An insurance policy where the policyholder deposits money with a life insurance company in exchange for immediate or deferred income payments.

For immediate annuities, a lump sum of money is deposited with the insurance company in exchange for immediate guaranteed income payments, either monthly, quarterly, or annually. Once the lump sum is given to the insurance company, the annuitant no longer has access to it. The guaranteed income payment amount is determined by the annuitant’s age and life expectancy. Payments may or may not be adjusted for inflation. Once payments start, they cannot be stopped.

For deferred annuities, a lump sum of money is deposited with a life insurance company in exchange for future income payments. Some deferred annuities, called “flexible premium annuities” or “saving annuities”, allow premium payments to be made over time.

While the payments are being deferred, the insurance company promises to pay either a fixed or variable interest rate on money inside the annuity (often referred to as a “crediting rate” or “interest credits”). Interest credits may be based on current bond interest rates, equity (stock market) returns, a market index-linked crediting strategy (“equity indexed crediting rate”), or a proprietary crediting strategy.

Generally, income payments received from the annuity may be deferred for as long as the annuitant wants, allowing the annuitant’s savings to grow for several years or even decades. When the annuitant wants income from the deferred annuity, the insurance company usually offers one of several different guaranteed income options.

When the annuitant dies, the death benefit of the annuity is equal to the remaining cash value of the contract adjusted by any step-up benefit provision in the contract. For immediate annuities, the annuitant can elect to leave income payments for beneficiaries for a specified period of time. This option must be elected at the time the annuitant chooses to annuitize their contract (or when immediate annuity income payments start) and cannot be changed later.

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