Annuity is a term that is familiar to most of us and that we have been now hearing for over 200 years. Annuities are nothing but products offered by insurance companies that allow you to save on taxes and derive benefit on retirement. These accumulated funds are later repaid to you either for a fixed term, say 5 to 10 year, or for the rest part of your life. Annuities are quite similar to Collateral deposits. CDs are offered by banks, similarly, insurance companies offer different return schemes on your annuity investments. What is the meaning of annuity? For a layman, an annuity is nothing but a contract between two parties, a person, also called as the insured and an organization which is nothing but an insurance company. The insurance company agrees to pay the insured an agreed upon benefit either in the form of regular interval payments or in lump sum. Who offers an Annuity? Annuities are presented by Insurance companies. They reach customers by the way of licensed agents. But before you chose to invest with the insurance company, you should check their insurance licenses. State and federal laws and insurance commissions govern the reserve funds, also known as State Legal Reserve Pools. How does an Annuity Scheme work? Annuity is a contract. The insured makes a deposit with the insurance company either in a single go or through regular small installments. Depending upon the type of annuity you choose, the money deposited with the insurance company will earn fixed or variable return. Different Types of Annuity: • Single premium immediate annuity: The amount is paid in lump sum and the benefits are derived from the immediate next month onwards. • Single premium deferred annuity: Again, the amount is paid in lump sum but the withdrawals can be made only after specified time limit • Annual premium deferred annuity: The premium paid to the insurance company is either in form of quarterly, or monthly or bi-annual or annual installments. Withdrawals are deferred to a later date. • Variable annuity: This is more of a combination annuity scheme where you can chose either to pay a lump sum amount or in installments. You can choose the investment vehicle as well. Thus, the growth of your fund depends on vehicle chosen. Thus, depending upon the scheme chosen by you, the amount deposited by you grows. At a time elected by you, the insurance company will start disbursing your deposits from your annuity account. You also have a choice of withdrawing funds in lump sum after a certain time elapses. Benefits associated with Annuities: • Tax Deferral: The money invested in an annuity scheme stays tax free and grows tax free till the time you withdraw it. The age set for withdrawals is 59.5 years. Any funds withdrawn prior to this age bear an annual penalty charge of 10%. • The insured gets a secured guaranteed return for the rest of life, especially post retirement Thus, annuity offers you a medium of saving, ensuring avoiding probate for your heirs, safety of funds and much more.