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Annuity: Annuity Terms

What Is an Annuity?

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 contracts issued and distributed (or sold) by financial institutions, which invest funds from individuals. They help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.

KEY TAKEAWAYS

  • Annuities are financial products that offer a guaranteed income stream, used primarily by retirees.
  • Annuities exist first in an accumulation phase, whereby investors fund the product with either a lump-sum or periodic payments.
  • Once the annuitization phase has been reached, the product begins paying out to the annuitant for either a fixed period or for the annuitant’s remaining lifetime.
  • Annuities can be structured into different kinds of instruments – fixed, variable, immediate, deferred income, that give investors flexibility.

Understanding Annuity

Annuities were designed to be a reliable means of securing steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk of outliving one’s assets.

Annuities can also be created to turn a substantial lump sum into steady cash flow, such as for winners of large cash settlements from a lawsuit or from winning the lottery.

Annuity Types

Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.

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