Income Annuities are the only investment vehicles that can guarantee investors that they will not outlive their income, and they do this in a tax- favored manner. Technically, income annuities are contracts from insurance companies providing for the systematic payment of principal and interest over time.

An income annuity is established when a customer makes a cash payment to an insurance company, which invests the money. In return for making a deposit into the income annuity, the insurance company agrees to pay the owner a specified amount periodically, beginning on a specified date. Each payment will include a portion of the original premium paid into the contract and a portion of interest. Taxes will only apply to the interest portion of the payment.

The most common payout options made available from the insurance company are life only, life plus a guaranteed return of principal and joint life. These payout options range from the highest payout option (life only) to the lowest payout option (joint life). The primary reason most individuals purchase an income annuity is to secure a guarantee from a highly rated insurance company and transfer the risk of running out of income before death.