Define Annuity: What Is It?

To define annuity, consider the U.S. form of this investment. In short, an annuity is a distribution of money. The money is earned from an investment on a set schedule. This schedule is often quarterly, bi-annually or sometimes annually. The most common use of an annuity is as part of a retirement plan, though annuities can be found in various other types of investments as well. As you define annuity, note that an annuitant is the recipient of the funds from the annuity.
The use of an annuity is to help ensure that income is stabilized over a period. For example, in retirement planning, the annuity is in use to make sure that the recipient is able to collect income at a rate that is appropriate for the individual’s needs over the period of their retirement years. After the individual stops working, he can trust that the annuity will continue to pay out over a period, hopefully for his later years of his life. In order for this annuity to be established, the individual paid into a pension fund. The pension funds were then invested in such a way as to gain sizable profit for the investor and the investee. At the time of retirement, the investment is then an annuity, which is distributed to the retiree.
Define Annuity Set Up
As you define annuity, it can help to understand the actually process that is used to put establish them. A firm sets up most annuities. An annuitant has the option to invest tin installments, the most common method. It is possible to form an annuity with a lump sum payment, though. Unlike most forms of life insurance, the annuitant does not have to get a physical to obtain the investment. It is used during the lifetime of the individual, rather than focusing on paying for children, for example. The contract for the annuity will outline all specifics regarding it, which includes all terms, the length of time that the annuity covers and whether the annuity is fixed or not.
The choice of whether or not the annuity is fixed is up to the firm and to the annuitant. A fixed annuity can be considered more stable since it offers a guaranteed return on the money that is invested. Yet, if the market conditions improve, the funds received by the annuitant do not increase. Those who wish to play the market, so to speak, can select a variable annuity. The terms of this type of annuity are also required to be defined in advance and in the contract that is obtained.
When you define annuity, it is also important to note that when an individual dies, the annuity cease to payout. In some rare cases, they can be structured to pay for a set amount of time afterward, such as when they are rolled over to a spouse or to minor children. This may occur most often with government pensions rather than most other forms of annuities.