Annuity – Meaning and Definition

What is Annuity?

An annuity is a financial contract or agreement crafted by financial institutions with the objective of disbursing invested funds through a fixed income stream in the future. These can be acquired through either monthly premiums or lump-sum payments. Essentially, the holding institution establishes a future stream of payments for a predetermined duration or for the entirety of the annuitant’s life. Primarily designed for retirement planning, annuities serve to alleviate the risk of depleting one’s financial resources during retirement.

The fundamental concept behind annuities is to ensure a reliable cash flow during retirement, eliminating concerns about potential asset exhaustion. Recognizing that conventional investments may fall short, many investors turn to financial institutions or insurance companies to secure an annuity.

Consequently, annuities are well-suited for individuals or investors seeking a dependable and guaranteed source of retirement savings.

Types of Annuities:

1. Immediate Annuities:
   • In this arrangement, an employee makes a one-time payment or a series of smaller installments to the insurance provider.
   • The payment is promptly disbursed, either as a lump sum or over a shorter time frame.
2. Deferred Annuities:
   • Payment is scheduled for a specific future date in a deferred annuity contract.
   • Various timelines for delayed annuity distribution exist, allowing individuals to select a plan that pays out over 10 or 20 years from the initiation date, continuing for the duration of their lives.
3. Qualified Employee Annuities:
   • Employees can explore annuity options through their employer, often presented as a qualified employee annuity scheme.

By comprehending the diverse types of annuities available, individuals can make informed decisions aligned with their specific financial goals, securing a stable foundation for retirement.