The term annuity is used in finance theory to refer to any terminating stream of fixed payments over a specified period of time. This usage is most commonly seen in academic discussions of finance, usually in connection with the valuation of the stream of payments, taking into account time value of money concepts.
Examples of annuities are regular deposits to a savings account, monthly home mortgage payments and monthly insurance payments. Annuities are classified by payment dates. The payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other interval of time.
In U.S. the term annuity is referring to an insurance contract. An annuity contract is created when an individual gives to a life insurance company money which may grow on a tax-deferred basis and then can be distributed back to the owner in several ways. Annuity contracts are defined by the Internal Revenue Code and regulated by the individual states. Variable annuities have features of both life insurance and investment products. Another remarkable fact in U.S. is that annuity contracts may be issued only by life insurance companies, although private annuity contracts may be arranged between donors to non-profits to reduce taxes. Annuities are a unique financial product that, along with Social Security, employer pensions, 401(k) plan, IRA and other assets, can enhance retirement security.
There are two possible phases for an annuity, one phase in which the customer deposits and accumulates money into an account (the deferral phase), and the annuity phase in which the insurance company makes income payments until the death of the customers (the "annuitants") named in the contract. It is possible to structure an annuity contract so that it has only the annuity phase; such a contract is called an immediate annuity. Annuity contracts with a deferral phase are similar to bank CDs and have a growth phase prior to distribution of income, and are called deferred annuities.
The newest incarnation is the fixed, equity indexed annuity product which can be either a fixed annuity or pure life insurance.
An equity-indexed annuity is in a small way different from other fixed annuities because of the way it credits interest to annuity's value. Most fixed annuities only credit interest calculated at a rate set in the contract. Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited.
Learn more about equity indexed annuity from Michael Dinich financial expert, on Annuityplanning.info.
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