Annuity

The term annuity (from Latin annus, a year), in current use in the insurance industry, refers to two very different types of legal contracts with very different purposes. Traditionally, for at least four hundred years, the term annuity referred to what is more correctly called today an immediate annuity. This is an insurance policy which makes a series of either level or fluctuating periodical payments, made annually, or at more frequent intervals, either for a fixed term of years, or during the continuance of a given life, or a combination of lives. The overarching characteristic of the immediate annuity is that it is a vehicle for distributing savings. A common use for an immediate annuity might be to provide a pension income to a person who is about to retire.

Investment Considerations

Because immediate annuities generally give a series of guaranteed payments, they are priced consistently with other guaranteed investments, such as government bonds. These are less risky than other investments, such as the stock market, and offer a lower expected return. Sometimes annuities are based on investments expected to give a better return, and the risk of these may vary from funds that incorporate some form of protection (for example by purchasing derivatives) through to pure equity funds based on shares alone. At the riskiest end of the market where the fund is not held in trust, the annuity provider risks going bankrupt and possibly defaulting on the policy, as happened in Japan in the 1990s.

Related Topics:
Stock market - Derivatives - Bankrupt - Japan - 1990s

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