An annuity is the scientific liquidation of both capital and interest with income payments so calculated that the annuity income does not stop before the person receiving it dies.
It is not really a life insurance policy and it does not offer life insurance protection. It is simply an accumulation and distribution of cash to provide income. In short, it’s a purchase of income.
Types of Annuity
1. Fixed Annuities. The income or interest yield in here is guaranteed and is based on fixed-dollar investments. Fixed annuities are further classified as:
- Single Premium Immediate Annuity. A single premium immediate annuity is one that is paid for in a single lump sum and then the company right away begins to pay the annuitant a regular income that is guaranteed to last for his/her lifetime.
- Single Premium Deferred Annuity. As compared to the type of annuity above, single premium deferred annuity is purchased by making a single payment but annuity income begins at some years after a single payment is made.
- Installment Deferred Annuity. This is also known as Retirement Annuity. The annuity fund is built up through a series of regular payments or installments, and the annuity income will begin at some time in the future.
2. Variable Annuities. Unlike fixed annuity, variable annuity cannot guarantee an interest yield from investments because its results are usually geared mostly to a portfolio of common stocks.