Understanding the Basics

How Does an Annuity Work?

An annuity is an insurance policy that can help provide you with a steady stream of retirement income. The issuing insurance company backs the guarantees of the annuity. This is why it’s important to find a reliable one. Additionally, there are multiple different types of annuities. Each annuity offers different features. And, each individual contract is a bit different. The right kind may help you achieve your financial goals for retirement.

grandfather sitting on a dock with his grandson splashing the water with their feet how does an annuity work

So, how does an annuity work?

Let’s look, specifically, at fixed indexed annuities, or FIAs. FIAs are tax-deferred. They come with higher interest growth potential than some annuities, while having less risk than others. This makes them, we believe, the best type of annuity product.

An FIA’s interest rate is based on the performance of an underlying index, for example, the S&P 500. Therefore, it offers indexed interest potential. An FIA does not, however, directly depend on the stock market. So, it’s protected from losing value if the market goes down.

Phases of Annuities

There are two phases to an annuity contract. While each type of annuity is different, these two phases apply to all of them. So, how do the phases of an annuity work?


The first phase is accumulation. This involves allowing your retirement money to increase in value over time. Essentially, by not withdrawing money during this phase, you give the insurance company a potential opportunity to increase the value of your annuity policy. This period does take time, however.


The second phase of an annuity contract is the distribution phase. This phase begins when you start taking payments from the annuity. Withdrawals can be scheduled for monthly, quarterly, or annual payments.  The option of receiving a lifetime income is also available.

Annuities and Taxes

Your money grows tax-free as it accumulates. You don’t pay income tax on the money until withdrawals are made. Taxes are owed only at this time. This is a very useful feature of an FIA if you want to reduce your current tax liability.

Contact us to learn more about annuities and how they work.

A fixed indexed annuity may be the missing piece to your retirement strategy.

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