What is an annuity?
Basically, an annuity is just a series or stream of payments. “Annuity” comes from the Latin for “year”. In the context of life insurance, it is a contract between you and an insurance company under which the insurance company pays you money for a stipulated period — often for life. The payments are frequently monthly. The person receiving the payments is referred to as an “annuitant.”
Risk and annuities
In a sense, an annuity is the reverse of a life insurance policy. Life insurance insures you against the risk of your dying too soon, but an annuity protects you against the risk of your living too long (which could result in your money running out while you are still alive). In a life insurance contract, there is a risk to the insurance company that the insured person may die earlier than expected; thus requiring the company to pay out money sooner than it planned. In the case of an annuity, the major risk to the insurance company is that the person may live a very long life — requiring more payments than the insurance company expected. Another risk is that the company may not be able to earn as great a return on its investments as planned, and so it may have less money to make payments when they are due. It is wise to buy an annuity only from a financially strong insurance company. Such a company is more likely to be able to pay its obligations. As with life insurance, the risk of annuities is spread over many people who have such contracts. This makes it easier for the insurance company to predict its risk.
Why have annuities become so popular as an investment in recent years?
Primarily, because of the possibility of tax deferral. After the tax law changes of recent years eliminated some other options, annuities are one of the few remaining ways to defer income tax on the growth of your investments.
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Thursday, October 15, 2009
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To put it simply, annuity is when an individual signs a contract with their insurance company. This contracts states that the individual will make a lump sum or series of payments to the insurance company. I know that sounds like what you always do for your insurance company, right? However, with an annuity the insurance company will make payments back to you beginning either immediately or at a future date. An annuity online usually offers growth of earnings and tax deferred status, as well as the possibility of a death benefit that will pay a certain amount to a beneficiary upon your death. Essentially any money you pay in to an annuity will be paid back to you plus any earnings of the initial payment in periodic payments monthly, quarterly, or annually.
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