Find out what an annuity is?

An annuity is a sequence of payments. The word "annuity" originates from the Latin language and is translated "year". You make a contract with an insurance company, according to which the insurance company pays you money for a definite period, usually for life. You have to make payments every month. The person who gets the payments is called an "annuitant". Annuities have become very popular nowadays as they make possible tax deferral. The recent changes in tax law have removed some other alternatives and annuities are now one of few ways to defer income tax on the increase of your investments.

An annuity is opposite to life insurance policy. People buy life insurance to protect themselves against the risk of dying too soon. As for an annuity, it ensures you against the risk of living too long and running out of your money long before your last day. While concluding a life insurance contract, the insurance company risks that the insured person may pass away earlier than expected and the company will have to pay out money sooner than it intended. On the contrary, if a person has an annuity, the insurance company risks to provide more payments than the company expected if the person lives a very long life. There is one more risk if the company is not able to earn as great a return on its investments as supposed, so it may not have enough money to make payments when necessary. It is recommended to purchase an annuity only from a financially strong and trusted insurance company. It is more likely that the company like this will fulfill its obligations.

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