What Is An Annuity?
The basic definition of an annuity describes a financial instrument or arrangement that provides regular, periodic payments. In the U.S., an annuity contract is often used to create a guaranteed income stream over a fixed period of time. Annuity payments may be made until a certain date or they may extend until the death of the person named in the contract.
Annuity contracts are defined by federal law in the tax code but are regulated at the state level. In most cases, annuities are issued by insurance companies, either as a life insurance product or as part of a large settlement for an injury claim. While there are numerous types of annuities, most annuities in the U.S. today fall into one of two broad categories.
An annuity with a period certain is one in which annuity payments are received by the annuitant for a certain number of years, (i.e., a “certain period”). Most large insurance settlements, as well as lottery winnings, are funded for a period certain.
A life annuity is an insurance product in which a preset periodic payout amount is paid out until the death of the annuitant. Typically, the annuitant purchases the annuity and pays into it while still working; upon retirement, the annuity then provides a steady stream of periodic payments to the annuitant. These payments are structured to last for the rest of the annuitant’s life. A life annuity may also have a guaranteed period of payments to provide a minimum return to the recipient.
Today, most people receiving structured settlement annuity payments enjoy tax-free income due to favorable monetary and tax policy on the part of the federal government. However, some may be eligible to pursue a strategy of selling their annuities to a factoring company in order to get an annuity cash out to help with changing financial needs. A structured settlement firm may be able to assist in such circumstances.
Selling Annuities