Definition - What does Annuity mean?
An annuity is an insurance product that an individual can pay into to later receive a steady set of payments in the future. During the accumulation phase, the insurance company receives payments from the owner for a specified number of years. Once this phase ends, it enters the annuitization phase during which the insurance company pays out a stream of payments to the owner.
Insuranceopedia explains Annuity
Annuity arose as a means for an individual to receive a steady flow of cash during their retirement and protect against the possibility of outliving one's assets. Social Security and defined benefit pension schemes are two of the most common examples of lifetime guaranteed annuities.
There are four kinds of annuities:
- Immediate annuity: It pays out as soon as the policyholder pays an initial investment.
- Deferred annuity: It accumulates money through investments of the policyholder’s payments for a specific duration. Thereafter, once the policyholder requires the cash, they provide regular payments.
- Fixed annuity: It pays a specific amount to the policyholder.
- Variable annuity: It pays benefits based on the performance of the overall market or a group of investments.