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Understanding an Annuity Contract

By Compuquotes Team on May 5th, 2009

Annuity

Annuity contracts come into existence when you purchase annuities. An annuity contract stipulates the obligations that the annuity provider (usually an insurance company) and you, as the contract owner, have to each other. Basically, when you purchase an annuity, you provide the company with a lump sum of money in exchange for a regular income which the company will supply you over a number of years.

Annuity contracts are written agreements, which specify the type of annuity purchased. For example, it states whether your invested sum is allowed to accumulate at a fixed rate or at a variable rate. In a fixed annuity, the invested amount grows at a fixed rate specified by the company. The rate will never change for the duration of the accumulation period - the time at which your money earns interest and no payouts are done. In a variable annuity, the money you deposited will be invested by the company in stocks and bonds. Consequently, the rate at which your money grows is dependent on the performance of the stocks and bonds.

The amount to be paid to the company (the premium) and the amount of the annuity payment (the amount paid to you by the company) is also stipulated in the contract. It is further stated whether the annuity payment be done monthly, quarterly or yearly.

It can also be seen from the contract whether the annuity purchased is immediate or deferred. Immediate annuity pays the annuitant a period after the payment of the premium. If the payment frequency of the annuity is quarterly, the first annuity payment should be received 3 months after the premium is paid. In a deferred annuity, the invested money is allowed to earn interest for a number of years before the annuitant begins to receive his regular income.

Provisions for spousal coverage and death benefits can also be found on the contract. When the contract owner purchased a single life annuity, only the annuitant receives payment which stops the instant he dies. In a joint life annuity, the company continues to pay the survivor mentioned in the contract. In most cases, the second annuitant (survivor) is the spouse of the first annuitant.

There are at least three important parties (other than the insurance company) mentioned in an annuity contract: the contract owner, the annuitant and the beneficiary. The contract owner is the one who purchased the annuity, the annuitant the one who will receive regular payments. In most cases, the contract owner and the annuitant are the same person. A beneficiary may also be stated on the contract, depending on the type of annuity purchased.

One of the details that a contract owner has to look out for in annuity contracts is charges. The owner has to make sure that he fully understands the charges he may incur, such as penalties for partial withdrawal or surrender of the entire annuity. It is distressing for an owner to find out that he needs to pay hefty charges if he decides to cash in on his annuity. Most often you have to pay larger fees for withdrawals on newer annuities.

As with any contract, it is vital that a contract owner has completely read and understood all the stipulation in an annuity contract.

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