An annuity is a distribution of money earned on an investment on a set schedule such as quarterly, biannually, or annually. Typically, an annuity is used as part of a retirement plan, to ensure a fixed and stable income once the annuitant, or recipient, stops working, and an annuity may be designed to provide income for two. A common form of annuity is a retirement pension. While the retiree was working, he or she paid into a pension fund which was invested. After retirement, the return on the investment takes the form of an annuity distributed to the retiree.
Most people work with a firm to set up an annuity. The annuitant can either invest in installments, or purchase an annuity with a lump sum. Unlike life insurance, an annuity does not require a physical examination and is used to fund the individual during his or her lifetime, rather than surviving children or partners, except in certain circumstances. When the annuity is established, the annuitant signs a contract which outlines the exact terms of the annuity, including the length of time that it covers and whether or not it will be fixed.
A fixed annuity is a safer investment, because it guarantees the return of a set amount of money with every payment. However, should the market improve, the annuity payments will still remain the same. In a variable annuity, the payments will vary depending on how well the investment is performing, which can translate into making more money, but can also result in much smaller payments in a weak market. A financial planner can provide advice on which option is better for the annuitant. For example, a couple might want to consider one fixed and one variable annuity, while a single retiree who intends to rely solely on the annuity for income should probably choose a fixed annuity.
In most cases, the annuity ceases once the annuitant dies. In rare instances, an annuity can be contracted to roll over to a surviving spouse or minor children. This is common with government pensions, which surviving children can collect until they turn 18 or 21, depending on the prevailing laws. Most financial firms establish annuities which end with death, under the assumption that some annuitants will die before they have made the return on their investment, while others will outlive their investment, leaving a margin for profit if the company invests well.
» How are annuities different from life insurance?
» Why should I consider purchasing an annuity?
» How much should I invest in an annuity?
» How do I pick a life insurance company?
» How do I pick an insurance agent?
» What is a “free-look” provision?
» How will I receive my annuity payments?
» What are the different types of annuities?
» How often should I review my annuity portfolio?
» What if I lose my annuity policy?
» How will I receive my annuity payments?
