Business, Legal & Accounting Glossary

Definition: Annuity


Quick Summary of Annuity

A purchased policy that pays a fixed amount of benefits every year — although most annuities actually pay monthly — for the life of the person who is entitled to those benefits. In a simple life annuity, when the person receiving the annuity dies, the benefits stop; there is no final lump sum payment and no provision to pay benefits to a spouse or other survivor. A continuous annuity pays monthly installments for the life of the retired worker, and also provides a smaller continuing annuity for the worker’s spouse or other survivor after the worker’s death. A joint and survivor annuity pays monthly benefits as long as the retired worker is alive, and then continues to pay the worker’s spouse for life.

What is the dictionary definition of Annuity?

Dictionary Definition

  1. A contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. The holder is taxed only when they start taking distributions or if they withdraw funds from the account. All annuities are tax-deferred, meaning that the earnings from investments in these accounts grow tax-deferred until withdrawal. Annuity earnings are also tax-deferred so they cannot be withdrawn without penalty until a certain specified age. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns. Both are relatively safe, low-yielding investments. An annuity has a death benefit equivalent to the higher of the current value of the annuity or the amount the buyer has paid into it. If the owner dies during the accumulation phase, his or her heirs will receive the accumulated amount in the annuity. This money is subject to ordinary income taxes in addition to estate taxes.
  2. More generally, a series of payments of set size and frequency, often to a retired person.

A right to receive amounts of money regularly over a certain fixed period, in perpetuity, or, especially, over the remaining life or lives of one or more beneficiaries.

Full Definition of Annuity

An income-generating investment whereby, in return for the payment of a single lump sum, the annuitant receives regular amounts of income over a predefined period.

An annuity is an investment-related product designed to provide monetary payments to an annuitant at regular intervals. In many cases, an annuity is a contract sold by an insurance company. An annuity is frequently used as retirement income and often cannot be withdrawn until a specified age. Tax deferral benefits are offered with an annuity, which means that annuity earnings grow tax-deferred until the time of withdrawal. The most common type of annuity is similar to a savings account. The annuitant deposits a sum of money (the principal), with an insurance company, business or an individual to be invested in a manner that will allow the principal to earn income at a certain percentage. The payments of an annuity can be at a fixed rate or a variable rate. A fixed annuity ensures a specified payment amount, while a variable annuity does not. Other types of annuities include a straight annuity, a deferred annuity, a joint annuity, and a cash refund annuity, among others. An annuity typically has a death benefit, with the accumulated earnings going to the annuitant’s heirs or other beneficiaries.

Two kinds of annuities are most common: variable annuities and fixed annuities.


Annuities are classified according to the nature of the payment and the duration of time for payment. A fixed annuity requires payment in a specified amount to be made for the term of the annuity regardless of economic changes due to inflation or the fluctuation of the ventures in which the principal is invested. A variable annuity provides for payments that fluctuate in size contingent upon the success of the investment of the principal. Such variation offsets the effect of inflation upon the annuitant. If, however, the investment has fared poorly, the size of the payments decreases.

straight annuity is a contract by an insurance company to make variable payments at monthly or yearly intervals. A life or straight life annuity is payable to an annuitant only during the annuitant’s lifetime and ceases upon his or her death. The size of the periodic payment is usually fixed based upon actuarial charts that project the expected life span of a person based upon age and physical condition. This type of annuity often contains provisions that promise payment to be made to a secondary beneficiary, named by the annuitant to receive benefits in case of the annuitant’s death, or to the annuitant’s heirs for a period of time even if the annuitant has died before the expiration of the designated period. A deferred annuity is one in which payments start at a stipulated future date only if the annuitant is alive at that time. Payment of the income tax due on the income generated is delayed until payments start. A deferred annuity is used primarily by a person who does not want to receive payments until he or she is in a lower tax bracket, such as upon retirement.

refund annuity, sometimes called a cash refund annuity, is a policy that promises to pay a set amount annually during the annuitant’s life. In case the annuitant dies before receiving payments for the full amount of the annuity, his or her estate will receive a sum that is the difference between the purchase price and the sum paid during the annuitant’s lifetime.

joint annuity is one that is payable to two named persons but upon the death of one, the annuity terminates. A joint and survivorship annuity is a policy payable to the named annuitants during their lives and continues for the benefit of the surviving annuitant upon the death of the other.

Fixed Annuity

A fixed annuity is a contract to pay a specific payee a specified amount for a specified period. The contract is similar to a company pension plan. The basic product usually will pay a specified amount per month to the retiree for life. However, numerous modifications are offered. The payments may be made to the individual or to his spouse or may pay a reduced amount to the spouse. The payments may be for a specified period, or for a specified minimum period.

The amount paid for a fixed annuity is determined by the life expectancy of the individual insured. The same actuarial tables used for life insurance determine the cost of your contract. Hence, your age and sex affect the cost. Interest rates when the policy is sold are also a factor. High-interest rates give lower prices or higher payouts.

The insurance company assumes the risk that you will live far longer than the actuarial tables indicate. In the case of a life payment plan, they will pay for life. But similarly, if you die before the calculated time, the insurance company keeps the rest of your money. A minimum payment period can be used to guarantee at least a minimum number of payments. Then the payments are made to your designated beneficiary.

Most annuities pay a fixed payment for life. Hence, they offer no protection from inflation. However, contracts are available that will ramp up payments at a specified rate say 3% per year. This feature too increases the cost of the contract.

Variable Annuity

A variable annuity has an accumulation period. The funds you contribute are invested in a specified portfolio and allowed to grow tax-free. On a specified date, usually after age 59-1/2 you can annuitize the contract and begin taking distributions. That means the cash value of your investment account is converted to a fixed annuity as described above.

Variable annuities are heavily promoted by insurance agents. They pay high commissions. The fees charged to manage the funds can be quite high, and surrender charges can be payable for as long as seven years if you remove your money prior to a specified date.

These days index annuities are popular. They usually are claimed to allow your funds to grow with the stock market while protecting you from losses. The protection takes the form of a guarantee that your account balance will be annuitized at no less than the amount you contributed, sometimes with some percentage escalator. The deficiency reported by many is that the gains are capped at a specific amount per year or quarter. Hence, in a good year, you often max out your gain while the market continues higher. Then in a bad year, you may not gain much. Meanwhile, the guaranteed floor does not come into play until you have lost nearly all your gains.

Annuities can be appropriate for some. Your funds are professionally managed, and you have no concerns that you will outlive your funds or your investments will fail to provide for your needs. But most individuals would be better off investing in good quality mutual funds where fees are lower and you can more easily move your funds if performance does not live up to promises.

1035 Transfer

A section of the Internal Revenue Code allows you to move the assets in your annuity from one company to another without incurring an income tax liability. This allows the annuity owner some flexibility in the case of the annuity that fails to perform as expected.

Before undertaking a transfer, the owner should be aware of surrender charges on the contract. Most annuities have a schedule of surrender charges for some years after the contract is signed. A transfer becomes more affordable once the surrender period is expired.

AM Best Rating

The annuity contract creates a financial relationship with the issuing insurance company. The promises and guarantees in the contract, indeed the security of your investment, depends on the financial stability of the issuing company. Moreover, financial stability is an especially important consideration in the case of an annuity because the contract terms can continue for decades.

AM Best is a rating agency for insurance companies. Before you sign an annuity contract check out the AM Best rating of the issuing company.

Tax Aspects

When an annuity is paid to an annuitant, he or she receives a portion of the principal and part of the return it has earned. For federal and state income tax purposes, only the amount attributable to the income generated by the principal, not the principal itself, is considered taxable income. The Internal Revenue Code provides an exclusion ratio to determine the amount of taxable income paid to the annuitant. Special tax rules apply to annuities that are qualified employee retirement plans.

The annuity payments made to the estate of a decedent might be subject to estate and gift tax as an asset of the decedent’s gross estate. Federal and state laws governing estate tax must be consulted to determine the liability for such taxes.

Examples of Annuity in a sentence

Paul receives a small annuity.

Investors ought to consider allocating some money towards an annuity.

Your money can grow much faster in a tax-deferred annuity, than in a taxable account.

In the financial jargon. an annuity is just a regular flow of cash into or out of an account.

In order to make larger returns, I’ve decided to transfer my life insurance into an annuity.

He was compensated by an annuity charged upon the land.

After her husband’s death, the widow was able to live comfortably on the annuity payments from his life insurance policy.

While it may be tempting to convert your policy into an immediate annuity, if you defer your annuities you will receive more money when you retire.

Synonyms For Annuity


Related Phrases

Actuarial tables
Fixed annuity
Index annuity
Insurance company
Interest rate
Life expectancy
Life insurance
Stock market
Variable annuity

Annuity FAQ's

What Is An Annunity?

An annuity is a series of payments made at equal intervals. Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments, and pension payments. Annuities can be classified by the frequency of payment dates

Income from capital investment is paid in a series of regular payments.

If you do not pay a secured loan, they will take away whatever assets we used to secure the loan

Cite Term

To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
Modern Language Association (MLA):
Annuity. Payroll & Accounting Heaven Ltd.
January 29, 2022
Chicago Manual of Style (CMS):
Annuity. Payroll & Accounting Heaven Ltd. (accessed: January 29, 2022).
American Psychological Association (APA):
Annuity. Retrieved January 29, 2022
, from website:

Definition Sources

Definitions for Annuity are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 28th November, 2021 | 21 Views.