The insurance company agrees to pay you the income for as long as you live. Meanwhile, as with other types of insurance policies, you can pass on some of the proceeds when you die in exchange for lower monthly checks. Only your earnings from the annuity are subject to federal taxes. Each annuity payment you receive is taxed proportionately, based on the value of the annuity and premiums paid. In addition, you'll pay income tax on earnings.
Annuities come in several shapes and sizes.
The most common are discussed below. Deferred fixed annuities. Fixed annuities currently yield from 5 percent to more than 7 percent, depending on the term to maturity. With a fixed-rate annuity, the insurance company pays you interest based on the performance of its investments. After the company subtracts the cost of doing business and a margin for profit, it may pay you 7 percent.