The meaning and definition of Annuity - A contract

The meaning and definition of Annuity -
A contract with an insurance company designed to provide tax-deferred growth of earnings for long-term goals, such as retirement savings. Annuity holders are taxed when taking distributions or withdrawals from the contract. Withdrawals of taxable amounts are subject to income taxes, and if taken prior to age 59½, a 10% IRS penalty may apply. Withdrawals also may be subject to surrender charges or contingent-deferred sales charges. All guarantees of annuities are based on the continued claims-paying ability of the issuing insurance company.

A fixed annuity earns a fixed interest rate that is guaranteed by the issuing insurance company for a specific period of time.

The return on a variable annuity is linked to the performance of the underlying investment sub-accounts — usually a combination of stocks, bonds, and/or money market securities — in which the contract owner chooses to invest. The principal value of variable annuities fluctuates in value, and may be worth more or less than originally invested when redeemed.