An annuity, in its most general sense, refers to an agreement where one party agrees to make a series of payments to another party. While the term “annuity” typically relates to a contract between an individual and a life insurance company, it can also involve a charity or a trust.
Annuities can be categorized based on various factors, including:
- Nature of the underlying investment: Annuities can be classified as either fixed or variable, depending on the investment component and potential returns.
- Primary purpose: Annuities serve different purposes, such as accumulation or pay-out. They can be further categorized as deferred or immediate, depending on when the payments begin.
- Nature of pay-out commitment: Annuities can have different pay-out structures, such as fixed period, fixed amount, or lifetime payments, which determine how and when the funds are distributed.
- Tax status: Annuities can be classified as qualified or nonqualified, based on the tax treatment of contributions and distributions.
- Premium payment arrangement: Annuities can have either a single premium or flexible premium payment arrangement, depending on whether the contributions are made in a lump sum or over a period of time.