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

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.

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 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

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 An annuity is frequently used as retirement income and often cannot be withdrawn until a specified age.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.

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, depend 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.

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

allowance, pension, income, share, revenue

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. September 27, 2021
Chicago Manual of Style (CMS):
Annuity. Payroll & Accounting Heaven Ltd. (accessed: September 27, 2021).
American Psychological Association (APA):
Annuity. Retrieved September 27, 2021, 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: 6th August, 2021 | 17 Views.