What Is the Definition of the Word Annuities

Life insurance companies and investment companies are the two main types of financial institutions that offer annuity products. For life insurance companies, annuities are a natural cover for their insurance products. Life insurance policies are underwritten to manage mortality risk, i.e. the risk of dying prematurely. Insureds pay an annual premium to the insurance company, which pays a lump sum upon death. Deferred income annuities are the opposite of an immediate annuity because they are not paid after the initial investment. Instead, the customer specifies an age at which they want to receive payments from the insurance company. Annuities can be a beneficial part of a pension plan, but annuities are complex financial vehicles. Because of their complexity, many employers do not offer them as part of an employee`s retirement portfolio. The noun annuity comes from the Latin word annus, meaning “year”. In fact, annuities are generally paid on an annual basis, although other conditions are possible. If you win a large amount of money in the lottery, you can usually choose a lump sum payment or smaller payments that are paid each year over a period of time, such as 20 or 25 years.

Figuring out which payment plan is best for you would be a good deal! One criticism of pensions is that they are illiquid. Deposits in annuity contracts are usually blocked for a period called the redemption period, during which the pensioner would incur a penalty if all or part of this money was touched. Agents or brokers selling annuities must hold a government-issued life insurance licence and, in the case of variable annuities, a securities licence. These agents or brokers usually earn a commission based on the face value of the annuity contract. Annuities come in three main variants: fixed, variable and indicated. Each type has its own risk and payment potential. Fixed annuities pay a guaranteed amount. The disadvantage of this predictability is a relatively modest annual return, which is usually slightly higher than that of a bank CD. Defined benefit pension plans and Social Security are two examples of guaranteed life annuities that provide retirees with regular cash flows until they exist.

Annuities can be structured based on a variety of details and factors, such as how long pension payments can be guaranteed. Pensions can be created in such a way that payments continue at the time of the annuity as long as the pensioner or his or her spouse (if the survivor`s pension is chosen) is alive. Alternatively, pensions can be structured to pay funds for a specific period of time, for example 20 years, regardless of the retiree`s lifespan. This is a payment made at fixed intervals. A common example is the payment retirees receive from their pension plan. There are two main categories of annuities: defined annuities and conditional annuities. Under a certain annuity, a number of payments are made, after which the pension ends. In the case of a conditional pension, each payment depends on the maintenance of a certain status; For example, an annuity exists only as long as the beneficiary survives. Conditional pensions depend on shared risk. Everyone contributes until the pension begins; Some will live long enough to collect more than they paid, while others won`t live long enough to get back the money they invested. Indexed pensions fall somewhere between the risk and the potential reward. You get a guaranteed minimum payout, even if part of your return is tied to the performance of a market index like the S&P 500.

The duration of withdrawals may also vary. You can choose to receive payments for a specific period of time, such as 25 years, or for the rest of your life. Sure, getting a lifetime payment can reduce the amount on each check, but it helps you not survive on your net worth, which is one of the main selling points of annuities. While variable annuities carry some market risk and the potential for capital loss, endorsements and features can be added to annuity contracts (usually at an additional cost) that allow them to act as hybrid fixed variable annuities.