An annuity is a contract between you and an insurance company: you pay a lump sum or series of payments, and the insurer guarantees income back to you, either immediately or starting at a future date. Annuities are primarily used for retirement income, tax-deferred growth, and protection against outliving your savings. Mid-market companies should also evaluate key person insurance to guard against the financial impact of losing critical leadership. For a closer look at streamlined coverage options, see our guide on how direct term life insurance works.
For business owners planning succession or key-person buyouts, annuities can also fund buy-sell agreements and deferred compensation plans. The choice between fixed, variable, and indexed annuities depends on your risk tolerance and income timeline. For businesses with SBA-financed assets, the hazard insurance requirements on those assets are a separate but equally important part of the financial planning picture. For a complete walkthrough of funding structures, see our buy-sell agreement life insurance guide.
Key Takeaways
- What it is: A contract with an insurer providing guaranteed income payments
- Types: Fixed (guaranteed rate), variable (market-linked), indexed (tied to an index with a floor)
- Tax advantage: Earnings grow tax-deferred until withdrawal
- Best for: Retirement income, longevity protection, and conservative savers wanting guarantees
- Drawbacks: Surrender charges, fees, limited liquidity, and complexity
Disclaimer: This article is for informational purposes only. Consult our licensed advisors for guidance specific to your situation.
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