annuities

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Annuities are financial theory terms used to refer to a stream of fixed payments over a period of time. It is viewed as the opposite of settlement funding, which is a business process by which securities are delivered against payment to fulfill the obligations arising from the contract with the financial institution.

Annuity can also refer to a financial product provided by insurance companies. Somewhat similar to private pensions, annuities are deals made with insurance companies by which an individual gives the company a large sum of money in return for receiving monthly payments either for a determined period of time or for the rest of their lives.

One benefit of such a financial product is that of having a guaranteed income until the end of one's life, with no risk of outliving one's savings. When the annuity is used to provide financial support to the annuitant for the rest of their lives, it is called a life annuity. The financial institution assess the risk of the loan based on the client's life expectancy. Consequently, they are also priced according to the probability of the client surviving the initial capital. For example, since a smoker's life expectancy is reduced, the annual payment to a smoking client is usually increased.

In order to guarantee that the income will be provided for life, but also that the insurance company has something to gain, it will rely on a statistics principle which is popularly called "the law of large numbers", meaning that, out of a large annuity population, those living longer will be supported with the money provided by those who live less.

In contrast, annuities with 'period certain' pays the annuitant only for an established number of years (period certain) and it is commonly used to fund the financial needs of the annuitant for a specific period of time. These types of annuities cannot truly replace pension plans, since the annuitants may outlive the annuity contracts.

Another usage for the term annuity refers to deferred annuity, or a means of accumulating savings with the purpose of eventually distributing them as a regular annuity. Deferred annuities benefit from tax-deferred growth, which means that value increases are not taxed until the money is withdrawn.

You'll find bloggers talking about annuities at sites like federalregister.gov.

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Original Technorati articles tagged “annuities”

  • in Finance
    Debating Annuities
    During these hard economic times annuities can be a safe investment and there are some tips investors can follow to help decide if annuities are right for them
    by Lisasocal / on Mar 30, 2010
  • in Business
    How Life Insurance and Annuities Differ
    Annuities and life insurance is an excellent way for you to prepare for retirement and both products should be considered for a solid financial portfolio. Although they both have death benefits, the benefits are applied under different circumstances.
    by Lisasocal / on Dec 1, 2009

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