To understand the difference between an annuity and a security, it is important to first learn, in basic terms, the instruments involved and how they relate to each other in the realm of investing and finance.
What Is an Annuity?
An annuity is a contract between an individual and a life insurance company where money is invested and allowed to grow on a tax-deferred basis. This means the individual is not taxed on earnings from investments in these accounts until distributions are taken or the money is withdrawn completely from the account.
Benefits of an Annuity
Individuals are usually interested in annuities as a retirement savings option because of its tax-deferred nature and the typical distribution option to receive regular, fixed streams of income in the future (during retirement). Like most retirement savings options, money cannot be distributed or withdrawn from these accounts without penalty before the age of 59 ½ .
What Is a Security?
A security is a negotiable instrument that represents some financial value and has the potential to appreciate (or depreciate) for the issuer or holder.
Types of Securities
Securities can be categorized as debt securities or equity securities. Debt securities typically include, but are not limited to, corporate and government bonds, bank notes, commercial paper and money market instruments such as certificates of deposit, while equity securities are usually common stock and derivatives contracts such as options and futures.
Is an Annuity a Security?
An annuity is not a security; however, the money in an annuity account will most definitely be invested in some of the underlying financial securities mentioned above.