Annuities are contracts that require one party to make regular payments for more than one full year to another (the annuitant). In exchange, the annuitant pays a premium, as with life insurance. In fact, annuities are a form of life insurance. If you want to buy an annuity, you will likely have to undergo some sort of underwriting process.
Annuities fill many different needs in financial planning, so over the years, insurers have developed many different types, including:
Fixed period annuities – pay a fixed amount to an annuitant at regular intervals for a definite length of time.
Variable annuities – make payments to an annuitant varying in amount for a definite length of time or for life. The amounts paid may depend on variables such as profits earned by the pension or annuity funds or cost-of-living indexes.
Single life annuities – pay a fixed amount at regular intervals during an annuitant’s life, ending on his or her death.
Joint and survivor annuities – pay a fixed amount to the first annuitant at regular intervals for his or her life. After he or she dies, a second annuitant receives a fixed amount at regular intervals. This amount, paid for the life of the second annuitant, may be the same or different from the amount paid to the first annuitant.
Qualified employee annuities – a retirement annuity purchased by an employer for an employee under a plan that meets certain Internal Revenue Code requirements.
Tax-sheltered annuities – a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization.
Annuities have many uses in financial planning, particularly in retirement planning. Some require a securities license to sell, in addition to a life insurance sales license.
