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Basic of Annuity: How It Works

 An annuity is a financial product that pays out a fixed stream of payments to an individual, typically used as an income stream during retirement.

Here's how it works:

  1. An individual purchases an annuity contract from an insurance company.

  2. The individual pays a lump sum of money or makes regular contributions to the contract.

  3. The insurance company uses the money to invest in various financial products such as bonds, stocks, and real estate.

  4. After a certain period of time (such as the individual's retirement), the annuity contract begins to pay out a fixed stream of income to the individual.

  5. The income stream can be received for a specific period of time (such as for a set number of years) or for the individual's entire lifetime.

There are different types of annuities, such as fixed annuities, variable annuities, and indexed annuities. The terms and conditions of the annuity contract will depend on the type of annuity purchased.

It's important to consider that annuities come with some costs, such as administrative fees, mortality and expense risk charges, and surrender charges. It is important to review the terms of the contract, the fees and the company's credit rating before making a decision.

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