Annuity | Meaning and Definition

Annuity refers to a contract or agreement that financial institutions create and distribute with the goal of paying out invested funds in a fixed income stream in the future. Annuities are purchased or invested using monthly premiums or lump-sum payments. The holding institution creates a future stream of payments for a set amount of time or for the rest of the annuitant’s life. Annuities are mostly utilized for retirement planning and to mitigate the danger of outliving one’s resources.

The basic idea behind annuities is to provide some kind of cash flow in the retirement years and to remove concerns about people outliving their assets. Since these investments are sometimes not enough for their lives, some investors can opt to choose an annuity from financial institutions or insurance companies.

As a result, these types of things are suited for annuitants or investors who want stable and guaranteed retirement savings.

Types Of Annuities

  • Immediate Annuity – In exchange for payment from the insurance provider, an employee pays a flat sum or a series of lesser installments. Payment is made instantaneously or over a shorter period of time with an immediate annuity.

  • Deferred Annuity – Payment is made on a certain future date under a delayed annuity contract. Different forms of delayed annuity distribution timelines exist. Individuals can choose a plan that pays out 10 or 20 years from the start date and lasts the remainder of their lives.

  • Qualified Employees Annuity – An employee may also look for annuities through their company, which may offer a qualifying employee annuity scheme.