Annuity Overview

Annuity is a type of insurance contract where an individual pays a fixed amount either in lump sum or a series of payments and in lieu of that the insurance company promises to pay a certain amount of tax deferred money at regular intervals. The distinguishing feature of the annuity contract is the guarantee which the company gives for the income for a specified period or till the person dies. Thus the tax-deferred funds can be accumulated for retirement, which can then be used as a source for a guaranteed income for the rest of the life of a person.

Annuity is not like other life insurances, which covers insurance of life, but it guarantees a definite amount either for an entire life or for a limited period. In that sense, it is closer to the bank CDs, offering variable rates and returns on invested amount. They have features common to both insurance and investment products.

Its existence can be traced to two centuries back. During that time in America , it was used by the Presbyterian Church as protection for clergy and widow. Clergy would pay a certain amount and in return used to get lifetime payment.

Generally Annuities are of two types - fixed and variable. In a fixed annuity, a minimum amount of interest is assured when the account is growing. In contrast, a variable annuity is one in which one can choose his investment scheme with various investment options. The rate of return and the amount to be received in periodic payment will depend upon the chosen investment option.

There is also a special type of annuity that is called equity index annuity in which the return from investment is linked to a particular equity index, with a minimum guaranteed return that can vary during the accumulation period when the account is growing.

The basic idea underlying annuity is that you pay some amount to the insurance company and the company pays interest on this amount or guarantees a fixed monthly, half yearly, yearly payment for a certain period or for the rest of the life. It has become very popular mode of investment in recent times because of the fact that the general life span of people in the US has increased to almost eighty-five years. So people are expected to live twenty more years during their post retirement period. In this condition, annuity is a good option, which enhances financial security during their post retirement life.

There are incidentally hybrid annuities that essentially permit the investor to decide the value of savings to assign to the more traditional, fixed return instruments. So actually you have the liberty of choosing the extent of exposure to risk you want yourself to be involved in while going in for high interest  return giving investments.