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Annuity (financial contracts)
Structured settlement - information for buying or selling structured settlements : cash settlements and otherwise: structuredsettlementinfo.net
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Annuity (financial
contracts)
An annuity contract is a financial product, typically offered by a financial
institution, that may accumulate value and take a current value and pay it out
over a period of years. These contracts are regulated by various jurisdictions
and this has led to the term being focused on different features in different
parts of the world.
United States
Further information: Annuity (US financial products)
In the US, an "annuity" generally refers to a deferred investment contract that,
upon "annuitization," will make regular payments (e.g., on a monthly or annual
basis) to a person (called the "annuitant") for a period certain, over one or
more specified individuals' lifetimes, or over a combination of life and a
period certain. (See life annuity.)
Such contracts provide an income during retirement or a stream of payments as a
settlement of a personal injury lawsuit (i.e., a structured settlement). Some
annuities (called "joint life" or "joint and survivor" annuities) continue
paying a second person (i.e., the "beneficiary") after the annuitant dies, until
that person dies as well. (For example, an annuity may be structured to make
payments to a married couple, such payments ceasing on the death of the second
spouse.)
Annuities that make payments in fixed amounts or in amounts that increase by a
fixed percentage are called fixed annuities. Variable annuities, by contrast,
pay amounts that vary according to the investment performance of a specified set
of investments, typically bond and equity mutual funds.
Variable annuities are used for many different objectives. One common objective
is deferral of the recognition of taxable gains. Money deposited in a variable
annuity grows on a tax-deferred basis, so that taxes on investment gains are not
due until a withdrawal is made. Variable annuities offer a variety of funds ("subaccounts"
in the parlance of the industry) from various money managers. This gives
investors the ability to move between subaccounts without incurring additional
fees or sales charges.
An annuity is an insurance product; annuities are typically issued by the same
companies that issue life insurance policies, and the risks undertaken by the
issuer are fundamentally the same for both products -- that is, the insurance
company bets on the life expectancy of the customer. The result is to transfer
the effects of the uncertainty of an individual's lifespan from the individual
to the insurer, which reduces its own uncertainty by pooling many clients.
With a "single premium" or "immediate" annuity, the annuitant pays for the
annuity with a single lump sum. The annuity starts making regular payments to
the annuitant within a year. A common use of a single premium annuity is as a
destination for roll-over retirement savings upon retirement. In such a case, a
retiree withdraws all of the money the retiree has saved in, for example, a
401(k) (i.e., tax-advantaged) savings vehicle during the retiree's working life
and uses the money to buy an annuity whose payments will replace the retiree's
wage payments for the rest of the retiree's life. The advantage of such an
annuity is that the annuitant has a guaranteed income for life, whereas if the
retiree were instead to withdraw money regularly from the retirement account,
the retiree might run out of money before the retiree dies or not have as much
to spend while the retiree is alive.
Another kind of annuity is a combination of retirement savings and retirement
payment plan: the annuitant makes regular contributions to the annuity until a
certain date and then receives regular payments from the annuity until the
annuitant dies. Sometimes there is a life insurance component added so that if
the annuitant dies before annuity payments begin, a beneficiary gets either a
lump sum or annuity payments.
United Kingdom
In the UK, the term "annuity" generally refers to the actual contract that makes
payments. Commonly it is used to refer to a contract that is making payments
(with the means of saving being referred to as a "pension"). In Britain the
conversion of pension income into an annuity is essentially compulsory and this
has led to a large market for annuities.
Structured settlement - information for buying or selling structured settlements : cash settlements and otherwise: structuredsettlementinfo.net
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