annuity

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Annuity

A right to receive periodic payments, usually fixed in size, for life or a term of years that is created by a contract or other legal document.The most common form of an annuity is akin to a savings account. The annuitant, the person who creates an annuity for his or her own benefit, deposits a sum of money, the principal, with an individual, business, or insurance company to be invested so that the principal will earn income at a certain percentage, usually specified by the terms of the annuity. This income is used by the company to pay the annuitant. Each payment received by the annuitant, sometimes called the primary beneficiary, represents a partial return of the principal and a portion of the income generated by its investment. Such annuities are employed frequently to provide a source of income to persons upon their retirement. A group annuity contract supplies periodic payments to a retired individual member of a group of employees covered by their employer's master contract. A retirement annuity is a policy paid to the annuitant after retirement. If the annuitant dies prior to the expiration of the annuity or wants to surrender the policy, an amount specified in the terms of the annuity is returned to the annuitant's estate or designated beneficiary.

Classification

Annuities are classified according to the nature of the payment and the duration of time for payment. A fixed annuity requires payment in a specified amount to be made for the term of the annuity regardless of economic changes due to inflation or the fluctuation of the ventures in which the principal is invested. A variable annuity provides for payments that fluctuate in size contingent upon the success of the investment of the principal. Such variation offsets the effect of inflation upon the annuitant. If, however, the investment has fared poorly, the size of the payments decreases.

A straight annuity is a contract by an insurance company to make variable payments at monthly or yearly intervals. A life or straight life annuity is payable to an annuitant only during the annuitant's lifetime and ceases upon his or her death. The size of the periodic payment is usually fixed based upon actuarial charts that project the expected life span of a person based upon age and physical condition. This type of annuity often contains provisions that promise payment to be made to a secondary beneficiary, named by the annuitant to receive benefits in case of the annuitant's death, or to the annuitant's heirs for a period of time even if the annuitant has died before the expiration of the designated period. A deferred annuity is one in which payments start at a stipulated future date only if the annuitant is alive at that time. Payment of the Income Tax due on the income generated is delayed until payments start. A deferred annuity is used primarily by a person who does not want to receive payments until he or she is in a lower tax bracket, such as upon retirement.

A refund annuity, sometimes called a cash refund annuity, is a policy that promises to pay a set amount annually during the annuitant's life. In case the annuitant dies before receiving payments for the full amount of the annuity, his or her estate will receive a sum that is the difference between the purchase price and the sum paid during the annuitant's lifetime.

A joint annuity is one that is payable to two named persons but upon the death of one, the annuity terminates. A joint and survivorship annuity is a policy payable to the named annuitants during their lives and continues for the benefit of the surviving annuitant upon the death of the other.

Tax Aspects

When an annuity is paid to an annuitant, he or she receives a portion of the principal and part of the return it has earned. For federal and state income tax purposes, only the amount attributable to the income generated by the principal, not the principal itself, is considered taxable income. The Internal Revenue Code provides an exclusion ratio to determine the amount of taxable income paid to the annuitant. Special tax rules apply to annuities that are qualified employee retirement plans.

The annuity payments made to the estate of a decedent might be subject to estate and gift tax as an asset of the decedent's gross estate. Federal and state laws governing estate tax must be consulted to determine the liability for such taxes.

Cross-references

Pension.

annuity

n. 1) an annual sum paid from a policy or gift. 2) short for a purchased annuity policy which will pay dividends to the owner regularly for years or for life.

annuity

noun allotment, allowance, annua pecunia, annual allowance, earnings, income, pension, retirement income, return, specified income payable for life, stipend, subsidy, subvention, yearly payment
Associated concepts: annuity by a trust, annuity by will, annuity contract, annuity policy, antenuptial annuity, life innurance annuity, verifiable annuity
Foreign phrases: Annua nec debitum judex non separat ipsum.A judge does not divide annuities nor debt.
See also: allotment, pension, perquisite

annuity

an entitlement to a specified sum of money that lasts for the duration of the life of the beneficiary or annuitant. Annuities may be created under a trust or they may be purchased from a life insurance company (in which case no trust is needed).

ANNUITY, contracts. An annuity is a, yearly sum of money granted by one party to another in fee for life or years, charging the person of the grantor only. Co. Litt. 144; 1 Lilly's Reg. 89; 2 Bl. Com. 40; 5 M. R. 312; Lumley on Annuities. 1; 2 Inst. 293; Davies' Rep. 14, 15.
     2. In a less technical sense, however, when the money is chargeable on land and on the person, it is generally called an annuity. Doet. and Stud Dial. 2, 230; Roll. Ab. 226. See 10 Watts, 127.
     3. An annuity is different from a rent charge, with which it is frequently confounded, in this; a rent charge is a burden imposed upon and issuing out of lands, whereas an annuity is chargeable only upon the person of the grantee. Bac. Abr. Annuity, A. See, for many, regulations in England relating to annuities, the Stat,. 17 Geo. III. c. 26.
     3. An annuity may be created by contract, or by will. To enforce the payment of an annuity, the common law gives a writ of annuity which may be brought by the grantee or his heirs, or their grantees, against the grantor and his heirs. The action of debt cannot be maintained at the common law, or by the Stat. of 8 Anne, c. 14, for the arrears of an annuity devised to A, payable out of lands during the life of B, to whom the lands are devised for life, B paying the annuity out of it, so long as the freehold estates continues. 4 M. & S. 113; 3 Brod. & Bing. 30; 6 Moore, 336. It has been ruled also, that if an action of annuity be brought, and the annuity determines pending the suit, the writ faileth forever because no such action is maintainable for arrearages only, but for the annuity and the arrearages. Co. Litt. 285, a.
     4. The first payment of an annuity is to be made at the time appointed in the instrument creating it. In cases where testator directs the annuity to be paid at the end of the first quarter, or other period before the expiration of the first year after his death, it is then due; but in fact it is not payable by the executor till the end of the year. 3 Mad. Ch. R. 167. When the time is not appointed, as frequently happens in will, the following distinction is presumed to exist. If the bequest be merely in the form of an annuity as a gift to a man of "an annuity of one hundred dollars for life" the first payment will be due at the end of the year after the testator's death. But if the disposition be of a sum of money, and the interest to be given as an annuity to the same man for life, the first payment will not accrue before the expiration of the second year after the testator's death. This distinction, though stated from the bench, does not appear to have been sanctioned by express decision. 7 Ves. 96, 97.
     5. The Civil Code of Louisiana makes the following provisions in relation to annuities, namely: The contract of annuity is that by which one party delivers to another a sum of money, and agrees not to reclaim it, so long as the receiver pays the rent agreed upon. Art. 2764.
     6. This annuity may be perpetual or for life. Art. 2765.
     7. The amount of the annuity for life can in no case exceed the double of the conventional interest. The amount of the perpetual annuity cannot exceed the double of the conventional interest. Art. 2766.
     8. Constituted annuity is essentially redeemable. Art. 2767.
     9. The debtor of a constituted annuity may be compelled to redeem the same: 1, If he ceases fulfilling his obligations during three years: 2, If he does not give the lender the securities promised by the contract. Art. 2768.
    10. If the debtor should fail, or be in a state of insolvency, the capital of the constituted annuity becomes exigible, but only up to the amount at which it is rated, according to the order of contribution amongst the creditors. Art. 2769.
    11. A similar rule to that contained in the last article has been adopted in England. See stat. 6 Geo. IV., c. 16, s. 54 and 108; note to Ex parte James, 5 Ves. 708; l Sup. to Ves. Jr. 431; note to Franks v. Cooper, 4 Ves. 763; 1 Supp. to Ves. Jr. 308. The debtor, continues the Code, may be compelled by his security to redeem the annuity within the time which has been fixed in the contract, if any time has been fixed, or after ten years, if no mention be made of the time in the act. Art. 2770.
    12. The interest of the sums lent, and the arrears of constituted and life annuity, cannot bear interest but from the day a judicial demand of the same has been made by the creditor, and when the interest is due for at least one whole year. The parties may only agree, that the same shall not be redeemed prior to a time which cannot exceed ten years, or without having warned the creditor a time before, which they shall limit. Art. 2771. See generally, Vin. Abr. Annuity; Bac. Abr. Annuity and Rent; Com. Dig. Annuity; 8 Com. Dig. 909; Doct. Plac. 84; 1 Rop. on Leg. 588; Diet. de Jurisp. aux mots Rentes viageres, Tontine. 1 Harr. Dig. h.t.

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