Annuity
An annuity is a contract between you and an insurance company in
which you make a lump-sum payment or series of payments and, in return, receive
regular disbursements, beginning either immediately or at some point in the
future.
An annuity is a financial product
that pays out a fixed stream of payments to an individual, and these financial
products are primarily used as an income stream for retirees. Annuities are
created and sold by financial institutions, which accept and invest funds from
individuals.
The goal of annuity is to provide a steady stream of income,
typically during retirement. Annuities are appropriate financial products for
individuals seeking stable, guaranteed retirement income. Because the lump
sum put into the annuity is illiquid and subject to withdrawal penalties, it is
not recommended for younger individuals or for those with liquidity needs to
use this financial product.
Types
of Annuity
- Ordinary annuity: An ordinary annuity makes (or
requires) payments at the end of each period. For example, bonds generally
pay interest at the end of every six months.
- Annuity due: With an annuity due, by
contrast, payments come at the beginning of each period. Rent, which
landlords typically require at the beginning of each month, is a common
example.
- Fixed annuities provide
regular periodic payments to the annuitant.
- Variable annuities allow
the owner to receive greater future cash flows if investments of the
annuity fund do well and smaller payments if its investments do
poorly.
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