Annuity Terms & Definitions

By Compuquotes Team on June 10th, 2008


First, let's establish what an annuity is. An annuity is a financial product that is sold by a financial institution. The purpose of an annuity is to receive monies from an individual, make those monies grow, and then provide him a regular source of income later in life, usually at retirement. This income can be in the form of a fixed annuity or a variable annuity. The person agrees with the financial institution how long he will receive these payments, regardless of whether he's still living or not. For instance, an agreement can be entered into for a fixed period of 20 years.

  • Annuitant

Another term you should be familiar with is annuitant. You can guess the meaning of this term quite easily. It is the person who receives the benefits of an annuity or a pension. This also makes him the beneficiary of the annuity. An annuitant can also be the person on which a life insurance contract is based.

  • Annuity Unit

This is defined by financial experts as the accummulation unit which acts like a sub-account of the person's total annuities. It is a pre-determined and fixed ownership share of the annuitant's portfolio.

To cite an example: Mr. Jones will be retiring shortly. This means, among other things, that he will no longer be earning a salary and therefore needs to withdraw funds from his savings and retirement accounts to pay for his cost of living. Before he retired, he was making regular payments to his life insurance company in order to buy shares of a very large fund portfolio managed by the company. When Mr. Jones wishes to start withdrawing money, he has to convert his total savings into income, but to do this, he has to purchase annuity units with his money - the money that prior to his retirement he was saving as annuity units.

  • Annuity Contract

The written agreement between an insurance company and a customer outlining each party's obligations is an annuity coverage agreement. This document deals with precise arrangements relating to the type of annuity structure, early withdrawal penalties, provisions for the spouse and other such clauses that typically are covered in the annuity contract.

Like any financial agreement, an insured person benefits significantly from an annuity contract because it is legally binding on both insurer and insured. The insurer is obliged by law to make periodic and regular payments to the insured once the latter reaches retirement age. An annuity contract spells out the terms and conditions of the annuity, hence constitutes good protection for both parties.

  • 403(b) Plan

This is a type of annuity that qualifies as a 403(b) plan. Annuity contracts under this plan are also known as tax-sheltered annuities or tax deferred annuities. People who qualify for this plan are individuals who work for public schools, certain tax-exempt entities and certain religious ministers. This particular plan is also called a tax-sheltered annuity (TSA) plan and can be in the form of an annuity contract (with an insurance company), a custodial account (mutual fund investments) or a retirement income fund set up especially for church workers and employees.

  • Immediate Payment Annuity

This is a type of annuity contract where a person makes one full payment for a specified payment plan which takes effect immediately. An immediate payment annuity is usually purchased by people who have retired or are close to retiring (around age 65).

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