Annuity (Insurance)
An annuity is a financial contract sold by insurance companies that provides regular income payments to the holder, typically used for retirement planning. The individual makes either a lump sum payment or series of payments to the insurer, who then provides guaranteed income for a specified period or for life.
Example
“David purchased a $400,000 fixed annuity at age 60, which will provide him with $2,200 in monthly income starting when he turns 65.”
Memory Tip
Think 'Annual Unity' - bringing together annual payments to create a unified income stream for retirement.
Why It Matters
Annuities can provide guaranteed retirement income that you cannot outlive, offering protection against longevity risk when Social Security and pensions may not be sufficient. They serve as a foundation for retirement planning, helping ensure financial stability in your later years regardless of market conditions.
Common Misconception
People often believe annuities are investments like stocks or bonds, but they're actually insurance contracts designed to transfer longevity risk to the insurance company. Unlike investments, the primary purpose is income protection, not wealth accumulation, though some types do offer growth potential.
In Practice
Maria invests $250,000 in an immediate annuity at age 68. The insurance company guarantees her $1,456 per month for life, regardless of how long she lives. If she lives to 95, she'll receive over $470,000 total - much more than her initial investment. However, if she passes away after just 5 years, she'll have received only about $87,000, with the remainder kept by the insurance company unless she purchased a refund feature.
Etymology
From the Latin 'annuus' meaning yearly or annual, originally referring to yearly payments or income streams.
Common Misspellings
Compare insurance quotes and save
Related Terms
More in insurance
Other insurance terms you should know
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.