A life insurance company contract that pays periodic income benefits for a specific period of time or over the course of the annuitant’s lifetime. These payments can be made annually, quarterly or monthly.
From a life insurer’s viewpoint, an annuity presents the opposite mortality risk from a life insurance policy. Life insurance pays a benefit when the policyholder dies. An annuity pays benefits as long as the annuitant lives. With both products, the insurer’s profit or loss depends on whether it made correct assumptions about the policyholder’s life expectancy and the company’s future investment returns.
Annuity investments are tax-deferred; taxes are not due until income payments begin. Annuities are often used as a form of retirement savings and some allow tax-free loans. They can be bought on a periodic schedule or through a one-time payment. There are fixed-income annuities, which invest in a general insurer’s account and offer a fixed benefit payment, and variable annuities, where individuals can choose their own investments from a menu of funds offered by the insurance company including bond and stock funds. The account value of a variable annuity reflects the performance of the investments offered by the company and selected by the annuitant whereas fixed annuity payments are guaranteed, regardless of the performance of the insurance company’s investments.
