A product offered by an insurance company or an employer to which one makes contribution(s) and immediately or later begins receiving payments, which usually last the remainder of the annuitant's life. An annuity usually refers to a retirement account into which the annuitant makes payments over his/her working life. The payments are then invested and the annuitant begins to receive the principal plus earnings after retirement. A qualifying retirement account is an annuity that allows for either contributions or withdrawals to be tax-exempt up to a certain amount. However, a wide variety of annuities exist. An annuitant may make a one-time contribution or monthly contributions over a period of time. Likewise, one may begin to receive payments immediately or defer them to a later date such as retirement. One may elect to make fixed or variable contributions as well as to receive fixed or variable payments. See also: 401(k). IRA .
A stream of equal payments to an individual, such as to a retiree, that occur at predetermined intervals (that is, monthly or annually). The payments may continue for a fixed period or for a contingent period, such as for the recipient's lifetime. Although annuities are most often associated with insurance companies and retirement programs, the payment of interest to a bondholder is also an example of an annuity. See also annuity certain. contingent annuity. deferred annuity. fixed annuity. joint and survivor annuity. refund annuity. straight life annuity. tax-sheltered annuity. variable annuity .
Originally, an annuity simply meant an annual payment. That's why the retirement income you receive from a defined benefit plan each year, usually in monthly installments, is called a pension annuity.
But an annuity is also an insurance company product that's designed to allow you to accumulate tax-deferred assets that can be converted to a source of lifetime annual income.
When a deferred annuity is offered as part of a qualified plan, such as a
traditional 401(k), 403(b), or tax-deferred annuity (TDA), you can contribute up to the annual limit and typically begin to take income from the annuity when you retire.
You can also buy a nonqualified deferred annuity contract on your own. With nonqualified annuities, there are no federal limits on annual contributions and no required withdrawals, though you may begin receiving income without penalty when you turn 59 1/2.
An immediate annuity, in contrast, is one you purchase with a lump sum when you are ready to begin receiving income, usually when you retire. The payouts begin right away and the annuity company promises the income will last your lifetime.
With all types of annuities, the guarantee of lifetime annuity income depends on the claims-paying ability of the company that sells the annuity contract.
What Does Annuity Mean?
A financial product designed to pay out a stream of payments to the holder at a later point in time. Annuities are used primarily as a means of securing a steady cash flow for an individual during his or her retirement years.
Investopedia explains Annuity
Annuities can be structured in many ways, such as by the duration of the time in which payments from the annuity can be guaranteed or can be created so that upon annuitization, payments continue as long as the annuitant or spouse is alive. In addition, they can be structured to pay out funds for a fixed amount of time, say, 20 years, regardless of how long the annuitant lives. Annuities also can provide fixed periodic payments or variable payments. Variable annuities allow the annuitant to receive greater payments if the investments of the annuity do well but smaller payments if the investments do poorly. Although it is riskier than a fixed annuity, this allows the annuitant to benefit from strong returns from the annuity fund's investments. Annuities are flexible and therefore are suitable for many types of investors.