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What Is An Annuity?

Updated: August 2019

An annuity is one way you may be able to help fund your retirement years. An annuity is a contract between you and your insurer that can be used to provide income during retirement, says the Securities Exchange Commission (SEC).

When you invest in an annuity through a lump sum or by making periodic payments over several years, your insurer in return agrees to make regular payments to you that can last the entirety of your retirement, says the SEC.

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Types of Annuities

Before choosing an annuity, it's important to understand the different types and how they might affect your financial picture. The main categories of annuities include:

Fixed Annuities:
A fixed annuity offers a specified interest rate during the accumulation phase, or the period during which your value is growing in the annuity. When you are ready for your stream of payments to begin, the value of your funds is turned into a steady stream of payments that provide a specified payment for either a certain period of time — say, 20 years — or for an indefinite period, such as your lifetime or the lifetime of you and your spouse, the SEC says.*

Variable Annuities:
In a variable annuity, you direct funds accumulating in your annuity to investments of your choice that are offered by the insurance company — typically mutual funds, according to the SEC. Your income stream in retirement is dependent upon how well your investments performed during the annuity's accumulation phase, the SEC says.

Indexed Annuities:
An indexed annuity provides you with a return that is tied to a major stock market index, such as the Standard & Poor's 500 Composite Index, says the SEC. During the accumulation phase, your investment's rate of return reflects the performance of the selected index. However, these annuities typically also offer returns that are no less than a specified minimum, no matter the index's performance.

Advantages of Annuities for Retirees

Annuities can be an attractive retirement income choice for a number of reasons, including:

  • Tax Deferral: You don't pay taxes on the income and investment gains from your annuity until you begin receiving payments, says the Insurance Information Institute (III).*
  • Lifetime Income Stream: If you choose to receive annuity payments with a lifetime contingency, an annuity can provide an income stream for the duration of your retirement, the III says.**
  • Death Benefit: Should you pass away before you begin receiving payments, the person you name as a beneficiary will receive a specified payment, according to

Depending upon your state of residence, annuities may also offer other benefits, such as protection of your investment from creditors. For these reasons and more, an annuity may provide you and your family with increased financial security during your retirement. Consult with your insurer or investment professional to determine how you might best benefit from an annuity.

Related Resources:

This content is for informational purposes only and may not be applicable to all situations.

*Distributions taken prior to annuitization are generally considered to come from the gain in the contact first. If the contract is tax-qualified, generally withdrawals are treated as distributions of gain. Withdrawals of gain are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty.

**Insurance companies offer various payout options for annuity payments. Please consult with your insurer or investment professional for the payout type that may be right for you.

Variable annuities are long-term investments designed for retirement purposes. You should carefully consider the investment objectives, risks, charges and expenses of the investment options before purchasing a contract or investing money. These contracts have limitations and are sold by prospectus only. The prospectus contains important information about the annuity contract, including fees and charges, investment options, death benefits, and annuity payout options. Optional income riders carry additional costs and may have limitations or restrictions. To obtain a prospectus or the underlying portfolio prospectuses, please contact your Allstate Personal Financial Representative. Please read the product prospectuses carefully before purchasing a contract or sending money. Not insured by any federal government agency. May lose value.

Guarantees offered are subject to the claims-paying ability of the issuing company. "Standard & Poor's,®" "S&P,®" "S&P 500®" are trademarks of Standard and Poor's Financial Services LLC. and have been licensed for use by Allstate Life Insurance Company. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the product. Please note, one cannot invest directly in an index.

Please note that Allstate Life Insurance Company or its agents and representatives cannot give legal or tax advice. The brief discussion of taxes on this page may not be complete or current. The laws and regulations are complex and subject to change. For complete details consult your attorney or tax advisor.

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