Annuity (Insurance)
An annuity is a financial contract sold by insurance companies that provides guaranteed regular payments to the holder, typically used for retirement income. The individual pays a lump sum or series of payments to the insurer, who then provides periodic income payments either immediately or at a future date.
Example
“David purchased a $300,000 fixed annuity that will provide him with $1,800 monthly payments starting at age 67.”
Memory Tip
Remember 'annual payments' - annuities provide regular income like an annual salary in retirement.
Why It Matters
Annuities provide guaranteed income that can't be outlived, making them valuable for retirement security when Social Security and pensions may not provide adequate income. They offer protection against market volatility and longevity risk in retirement planning.
Common Misconception
People often believe all annuities are expensive and inflexible investment products. While some annuities have high fees, many offer competitive rates and various payout options, and they serve as insurance against outliving your money rather than traditional investments.
In Practice
Lisa invests $250,000 in a deferred annuity at age 55. The contract guarantees 4% annual growth for 10 years, growing her investment to approximately $370,000. At age 65, she converts to income payments and receives $2,100 monthly for life. Even if she lives to 100, she'll continue receiving these payments, having collected over $882,000 total.
Etymology
From the Latin 'annuus' meaning yearly or annual, referring to the regular yearly payments these contracts traditionally provided.
Common Misspellings
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Related Terms
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See Also
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