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What is an Annuity & How Do Annuities Work?


Annuities allow you to protect your financial future from unforeseen events and circumstances. An annuity is a contract between you and an insurance company. Annuities are most often purchased with income for the future in mind. There are two types of annuities—variable and fixed. Variable annuities tie growth to certain securities that can fluctuate with the market, including growth and loss.  
American Equity offers fixed annuities, which provide growth through declared interest rates or by linking interest growth to a market index. Fixed annuities have many benefits, including:
  • Principal Protection
  • Guaranteed Income
  • Tax-Deferred Growth
  • Liquidity
  • May Avoid Probate
In return for a premium paid by the policyholder, an insurance company will make a single payment or a series of income payments either immediately or at some time in the future. 
Annuities have two phases: a deferral phase and an income phase
  • Deferral Phase: the time period between the inception of the contract and the date of the first distribution in which values accumulate on a tax-deferred basis
  • Income Phase: the period of time in which income is withdrawn from the contract, which may be for a specified period of time or for your lifetime

Who can sell annuities?

Annuities can only be sold by licensed insurance professionals who completed product specific training. The agent must be a representative of the insurance company and must hold a valid insurance license in your state. Agents and representatives are compensated by the insurance company. No sales compensation is ever deducted from your annuity principal.


What is the tax treatment on annuities?

Under current federal law, annuities receive special tax treatment. Income tax on annuities is deferred, which means you are not taxed on the interest your money earns while it stays in the annuity. Earnings are taxable as ordinary income when distributed; and if withdrawn before you turn 59 ½, a 10% tax penalty may be enforced. Neither American Equity nor any of its agents or representatives are authorized to give tax advice. You should consult a professional tax advisor to discuss your individual tax situation.


American Equity offers three types of annuities:


Features and benefits may vary by product and state. Please review the contract or product disclosure for more information.
Tax Interpretations: Neither American Equity Investment Life Insurance Company® nor any of its agents or representatives give tax, legal or investment advice. Consult a qualified advisor.
Guarantees are based on the financial strength and claims paying ability of American Equity and are not guaranteed by any bank or insured by the FDIC.