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Annuity - Classification, Tax Aspects

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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.



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