If you've heard the word "annuity" at a dinner seminar or from a friend, you're not alone in wondering what it actually means. Here's a straightforward explanation.

The basic idea

An annuity is a contract you buy from an insurance company. You own it. The insurance company issues it and makes promises in the contract — such as protecting your principal or paying you income for life — and those promises are backed by the company's financial strength.

Why people use annuities

• To protect savings. Fixed and fixed indexed annuities keep your principal safe from stock market losses.
• To grow money tax-deferred. You don't pay income tax on the growth until you take money out.
• To create income you can't outlive. With an income option, an annuity can pay you every month for the rest of your life — like a personal pension.
• To leave money to family. Many annuities pass directly to your named beneficiaries.

The trade-offs

Annuities are not right for everyone, and it's important to understand the trade-offs:

• Most have surrender charges if you withdraw more than the free amount in the early years.
• Indexed annuities limit how much of the market's gain you receive.
• Withdrawals before age 59½ may face a 10% federal tax penalty.
• Lifetime income is available only if you choose an income option, which may have a cost.

Is an annuity right for you?

An annuity can be a good fit for part of your retirement savings — rarely all of it. The answer depends on your goals, your timeline, and what else you have in place. We're happy to look at your situation with you, plainly and without pressure.

Guarantees are backed by the claims-paying ability of the issuing insurance company. Annuities are not FDIC insured. Hudson Agency does not provide tax or legal advice.