Annuity
Also known as: annuity contract
An annuity is a contract with an insurance company designed to accumulate money and then pay it out as a stream of income, often guaranteed for life. It is primarily used to protect against outliving one's retirement savings.
An annuity is a contract between an individual and an insurance company in which the insurer agrees to make periodic payments in exchange for premiums paid up front or over time. Where life insurance protects against dying too soon, an annuity protects against the opposite risk — living so long that you outlast your savings.
Annuities have two phases. During the accumulation phase, the owner pays in premiums and the contract's value grows tax-deferred. At annuitization, the accumulated value converts into an income stream. Payout options include life income (payments for as long as the annuitant lives), life with period certain (life income with a guaranteed minimum number of years), joint and survivor (covering two lives), and fixed period or fixed amount options that don't depend on survival.
The main varieties differ in how money grows. A fixed annuity credits a guaranteed interest rate and the insurer bears the investment risk. A variable annuity invests premiums in separate account subaccounts, so the value fluctuates with the markets and the owner bears the risk — which is why variable annuities are regulated as securities and require both an insurance license and a securities registration to sell. Indexed annuities credit interest tied to a market index, subject to caps and floors.
Annuities are tested heavily on state life and health insurance licensing exams — phases, payout options, parties to the contract, and taxation — while the Series 7 exam covers variable annuities as securities products, including subaccounts, sales charges, and suitability concerns.
Key takeaways
- An annuity is an insurance contract that accumulates funds and converts them into periodic income, often guaranteed for life.
- The accumulation phase grows tax-deferred; annuitization begins the payout phase.
- Fixed annuities guarantee a rate (insurer bears risk); variable annuities fluctuate with subaccount performance (owner bears risk).
- Variable annuities are securities, requiring a securities registration in addition to an insurance license.
- Common payout options include life income, life with period certain, and joint and survivor.