How, What & Why about Annuity

An annuity basically refers to an insurance contract.

An annuity contract comes into existence when an individual gives the insurance company single payment or a series of payments which may grow tax deferred and then it is distributed back to the owner in several ways. The defining characteristic of annuity contract is the option for a guaranteed distribution of income for a specific period of time or till the death of the person or persons named in the contract.

Annuities allow a person to accumulate tax-deferred funds for retirement. These accumulated funds later form the basis of receiving a guaranteed income payable either for life or for a specified period of time. The specified period is generally a term of five or ten years. This whole process of converting an annuity investment into an series of payments is called Annuitization. Annuity is an insurance contract that comes into existence when an individual gives the insurance company single payment or a series of payments which may grow tax deferred and then it is distributed back to the owner in several ways. The defining characteristic of annuity contract is the option for a guaranteed distribution of income for a specific period of time or till the death of the person or persons named in the contract. It is this guarantee that makes annuities one of the most popular and trusted option among numerous alternatives.

Annuities are very popular in present time, but they should not be mistaken to be considered as some new phenomenon. In fact, the origin of annuities can actually be traced back to the Roman era. During the 17th century, annuities were used as fund raising vehicles in Europe. But it was only in the 18th century that annuities made their debut in America. In 1759, a company in Pennsylvania was formed to benefit presbyterian ministers and their families wherein Ministers would contribute to the fund, in exchange for lifetime payments.

Annuity contracts in United States are defined by the Internal Revenue Code and regulated by the individual states. Annuities have features of both life insurance as well as investment products. In United States, annuity contracts are only allowed to be sold by insurance companies, although private annuity contracts may be arranged between donors non-profits to reduce taxes.

Annuities have similarities to CDs offered by banks, just like banks, insurance companies offer different rates and returns on annuity investments. Annuities are offered by Insurance companies and sold through licensed agents. The insurance company and the agent must be validated for their license in annuity contract seekers state.

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