There are two types of fixed annuities, immediate and deferred. An immediate annuity is exactly what the name implies, a contract with the insurance company to begin receiving income IMMEDIATELY. You have several income options with an immediate annuity. You can have income paid for a specific period of time OR you can choose to have the insurance company pay you income for the remainder of your life. The amount of income is determined by the amount of initial deposit and the length of time you want the guaranteed income. You can also choose the option of having income paid for the remainder of both yours and your spouses life.
A deferred annuity is a contract with the insurance company to pay you interest for a specified period of time. Your principal amount is guaranteed and the interest accumulates TAX DEFERRED until you decide to withdraw it. Conversely, the interest paid on a bank CD is taxed annually (unless in a qualified retirement account like an IRA) which can dramatically decrease the rate of return. The benefit of tax deferred growth over time is you accumulate interest on principal, interest on interest AND interest on money you would have paid in tax. In most cases deferred annuities can be converted to immediate annuities and any time. So to dispell misconception number 2 regarding annuities: Annuities are more flexible than bank CDs
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