An annuity is a contract sold by insurance companies that pays a monthly (or quarterly, semiannual, or annual) income benefit for the life of a person (the annuitant), for the lives of two or more persons, or for a specified period of time. The annuitant can never outlive the income from the annuity. While the basic purpose of life insurance is to provide an income for a beneficiary at the death of the insured, the annuity is intended to provide an income for life for the annuitant. There are variations in both the way that payments are made by a buyer during the accumulation period, and in the way payments are made to the annuitant during the liquidation period.
An annuity may be bought by means of installments, with benefits scheduled to begin at a specified age such as 65; or, it may be bought by means of a single lump sum, with benefits scheduled to begin immediately or at a later date. No physical examination is required.” (Dictionary of Insurance Terms, Third Edition)
Simply put, an annuity is defined as a policy contract that agrees to pay the insured a regular income over a specified number of years. Often called “life insurance in reverse” because while life insurance protects against loss by premature death. Annuities, on the other hand, protect against “living too long.” However, most annuities have some sort of death benefit. By assuring continued payments for a specified or unlimited number of years, annuities guarantee that the insured will not deplete his or her source of income.
The time period over which the insurance company promises to provide income varies by type of contract is logically called the Annuity Period. The contract may specify an exact number of years or the individual’s lifetime (an unspecified number).
The person who purchases the annuity is the owner. The person who received payments from the annuity is the annuitant. The annuitant may or may not be the contract owner.
Annuities may be written on an individual, joint or group basis. The most common is the individual annuity that is usually purchased for retirement purposes. The “Joint and Survivor” annuity is also a common form for married persons. With this type of annuity, there are two persons insured and payments are guaranteed to continue to the surviving spouse upon the other’s death. Annuity payments can be either the same or different amount, usually designated as a percentage of the original amount (discussed in more detail later). Group annuities are generally part of a group pension or similar employee benefit plan.