Annuities Explained

An annuity is a type of investment contract that provides a regular stream of income for the term of the contract.

Fundamentally, annuities come in two popular forms: a “life annuity” and a “term annuity.” A life annuity provides the annuitant – that is, the person who receives the income – with a regular stream of payments for life. A term annuity provides the annuitant with a regular stream of payments for a specified period of time.

Income from either type of annuity can be received monthly, quarterly, semi-annually, or annually. The income payment consists of a portion of the money invested in the annuity and the interest income that the investment generates. Annuity payments can begin immediately upon execution of the annuity contract or can start at a later date. Payments can be structured in a number of different ways as follows:

  • Level payments that remain the same over the full term of the contract.
  • Payments that increase by a fixed percentage over time.
  • Variable payments based on the performance of annuity units.
  • Variable payments linked to a stock market index or other indicator.
  • Inflation-adjusted payments indexed to increases in the consumer price index.

Life and term annuities are close to a zero-risk investment. The owner of the contract knows when the contract is finalized, how much will be paid to the annuitant, and when. These details never change over the term of the annuity.  Annuities, the capital invested and the payments distributed are insured by a not-for-profit industry protection organization called Assuris, which ensures that annuity payments will continue should a member insurance company become insolvent.  There are limits and conditions to protection from Assuris and one should contact them to see how your funds would be protected. 

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