Definition of an Annuity Contract

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.

Definition of an Annuity Contract

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.

What is an Annuity Contract?

An Annuity Contract is a type of investment or financial product in which the investor or purchaser is expected to receive a certain amount of returns or profit in a future date. Any person or company can avail of this product, most especially people nearing retirement. Like any contract, an investor is bound to pay a certain amount over a period of time and expect a payback period for the investment. Depending on the kind of Annuity Contract, a guaranteed income or a risk of variable income or loss are associated with the investment.

Annuity Contract
Always be careful when signing contracts

 Kinds of Annuity Contract

A long term investment of Annuity Contract is called deferred annuity. In deferred annuity, the investor or company pays the purchase price and the repayment of income begins after the year of retirement. The investor or purchaser can either take the amount in lump sum or over a longer period. A predetermined annual yield is paid back over a period of time, this is called fixed rate of deferred annuity. The other type is variable rate, wherein the basis of pay increment is the performance of the investment.

How to go About Investing in Annuity Contract and the Benefit it will yield

Like any investment, there are benefits and risks involved. Depending on the type of annuity contract being purchased, there will be risks and benefits play. For those who love to play the investment game, the greater the risk of investment, the greater the yield or increment of investment involved as well as the risk of loss. But for those who prefer not take the risk and stick with the predetermined increment of investment, that could be a particular choice as well.

Reaching the retirement age is the best time to invest in annuity contract, since people reaching the age of 50 would have full understanding of financial processes and the money to invest. There listings of insurance companies that offer this product. Being unsure of the company to invest is common; in order to make things easy, an agent can handle the insurance need. The beneficiary must be taken into consideration as well since the future is unpredictable.

And lastly, whether the agent has full knowledge or has good arrangement for your annuity contract investment, it always pays to check and verify other companies so that a comparison can be made.