The definition of an Annuity Contract is a drafted agreement between and insurance company and a customer that explains the obligations of each party, such as the structure of an annuity-variable or fixed, any inherent penalties for early withdrawal, specific provisions for the spouse and more.
An Annuity is a financial product that is designed by financial institutions and is supposed to accept funds and grow them. Funds accepted from an individual, once they reach annuitization, are paid back as an income stream at a later point in time. Annuities hence become a mean to secure a steady cash flow for a person during their retirement years.
Annuity contracts exists under a 403(b) plan. They are referred to as ‘tax sheltered annuities’ or ‘tax-deferred annuities.’
An annuity contract is important for the individual investors because it legally binds the insurance company to provide a guaranteed periodic payment as soon as the annuity reaches maturity. The structure of the contract must be studied to ensure that risk free retirement income.
In the United States, a contract is created when an insured party pays an insurance company a single premium or a lump sum that will be paid back in installments over a stipulated period.
The annuity contact therefore guarantees a steady payment over time paid through fixed payments, until the death of a person or persons named in the contract.
Some annuity contracts can also provide clients with the leeway to accumulate funds free of income and capital gains tax and later to take lump sum withdrawals without using the guaranteed income stream opportunity. Most clients find this approach better and have adopted this method as the way forward.
Annuity contracts are usually defined by the Internal Revenue Code and thereby regulated at individual state level. Annuity insurance and hence annuity contracts can only be issued by life insurance companies. It is also a new practice though for donors to arrange finance to non-profits to reduce tax.
Based on state legislation, insurance companies may provide various annuity contracts between donors and non-profits to reduce taxes. As a result, some contracts may be available in some states that are not available in others. An annuity contract can be structured so that is has two possible phases, the deferral phase where the customer deposits accumulates money into an account and the income phase where customer receives a steady stream of income.