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An annuity, gnerally, is an insurance contract. Unlike a life insurance contract, where the company is betting that you will live longer than you think you will, the company is betting that you will die sooner than you think you will.

The contract has two general phases, the accumulation phase and the annuitization phase. In the accumulation you are putting money in and the money is growing tax deferred. In the annuitization phase the company is making regular payments to you either for your lifetime for for some specified "term certain". You can take distributions during the accumulation phase without triggering annuitization. In non-qualified annuities, those not part of a qualified retirement plan, distributions are taxable as ordinary income until you begin to withdraw your invested dollars. Those distributions are tax free. In qualified annuities all distributions are taxable as ordinary income.

Annuities come in two major flavors: fixed and variable. Fixed accumulate at a lower rate but are not exposed to market fluctuations. Variables consist of various investment options (subaccounts) generally consisting of a menu of mutual funds. You select your investment vehicles, reap the benefits and bear the risk of market fluctuations.

There is a place for annuities in comprehensive financial planning. But the decision is contextual, so there is no general right answer regarding whether annuties are a good investment choice. It depends on the situation. A lot of the bad rap found on other boards stems from the fact that annuities are sold/bought in contexts that are entirely inappropriate. This fact does not diminish the efficacy of annuities in appropriate situations.

Hope this rambling post helps. Post additional questions if you have some.

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