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Abstract
An annuity is a contract between two parties in which the first party, typically an insurance company, agrees, upon receipt of a specified dollar amount, to make periodic payments to a second party, typically one or two individuals, for an agreed upon period of time, starting either immediately or at some date in the future. The parties may define the stipulated period of time over which the payments will occur as (1) a definite number of years, (2) the lifetime of one or both of the individuals, or (3) a combination of (1) and (2). The recipient of the payments is defined as the annuitant. Like any other legally binding agreement, an annuity represents an irrevocable choice. Annuities exist outside of qualified plans. Generally, they are labeled tax-deferred annuities, and the investor buys one with posttax dollars. The annuitant has a number of payment options, including waiting until age 85 or talking a lump sum. Such a payment will produce income equal to the appreciation on the initial investment. The appreciation on the contract also enjoys a tax-free build-up, and only the growth is subject to tax.
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