If you don’t work in the financial industry or you haven’t received a settlement before, you might be a little unclear about what an annuity is and how it works. The purpose of this article is to clear up any misunderstandings that you may have about any type of annuities, whether they are investment annuities or structured settlement annuities.

What is an Annuity?

The definition of an annuity is a contract you have with an insurance company about making a payment or multiple payments in exchange for receiving regular disbursements over time.

These disbursements can begin right away or start at a more distant date in the future. The purpose of annuities is to provide you with a reliable source of income in your years ahead, whether that be for retirement or as part of settlement earnings you’ll receive for the rest of your life.

How Do Annuities Work?

Annuities are a form of long-term financial investment that helps you sustain income over a specified period of time.  These payments can last for a certain amount of time or for the rest of your life.

When choosing to open an annuity, you can invest a lump sum of cash or invest regularly over a period of time. You can also choose when to start receiving your payments. Structured settlements, for example, are a type of annuity that provide these types of payments on an ongoing basis.

Types of Annuities

There are several types of annuities that you should understand to prepare for the future. One type is the fixed annuity, which is low-risk and provides you with a guaranteed amount of payment based on the total sum of your account. This type of annuity can you provide you with peace of mind because of its stability; however, the annual returns tend to be fairly modest.

Another type of annuity is the variable annuity, which can potentially provide you with a greater return in exchange for a higher risk. This type of arrangement works by selecting mutual funds and receiving payouts based on how those funds are performing.

And a third type of annuity that falls somewhere in between these other two options is called the indexed annuity. Although finding a balance in the middle might sound like an attractive option for some people, be aware that these annuities can be complex and you might incur fees if you try to access the sum of your money within the first few years.

Understanding the Deferred Annuity

If you choose to start receiving your annuity payments right away, this is called an immediate annuity. However, you can also choose a date in the future to begin receiving your payments, and this is called a deferred annuity.

You may wish to defer your annuity to increase your retirement savings once you’ve made as many contributions to your 401(k) or IRA as possible. You can choose a deferred variable annuity or a deferred fixed annuity based upon how much risk you’re willing to take.

The type of annuity and pay structure you choose ultimately depends upon your financial situation, monetary needs, and future goals. Make sure to discuss your options with a trusted financial professional to put yourself and your family in the most optimal position for comfort and prosperity.


*Novation is not a financial advisor and/or consultant and strongly recommends that you speak to a lawyer and/or accountant before making any significant financial decisions.