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What's an Annuity? Without the Jargon

In English, an annuity is what happens when you give someone a large amount of money, and they promise to give you a check every so often from that money later. Kind of like getting paid just because you had a lot of money at one point.

Translating Annuities back into Jargon

To be more specific, and legally correct, let’s take that knowledge and go back into finance speak. An annuity is when you make a contract with an insurance or investment company (they’re the ones who make these things) with the understanding that you’ll give them money for some period of time, and later on the company will gradually give you money back.

The time in which you give money is called the accumulation period or phase.

The time you get your money back is called the annuitization period or phase. (It’s so jargony my word processor doesn’t think it’s a real word!)

There are tons of things that can change between different annuities. Such as when money transfers, how much money you get and why, and a slew of other options and features that you can add onto it! We’ll get into each of these specific features and topics in later articles.

For now, let’s keep to annuities as a general concept.

How does an annuity work, really?

You’re trying to make money, the company is trying to make money, and the middle man is trying to make money. So how is this split up?

Your “goal” with an annuity, is to live. Simply follow the rules of the contract, usually not to take any cash out too early, and live long enough to get every easy check you can out of the company.

So if you want the most out of your annuity, be sure to take care of yourself!

The company meanwhile, wants you to pay your fees, and it generally structures the instrument so that they get a little bit of profit from those fees by taking a guess at how long you will live to claim your checks. They're usually great at this guess across all their clients on average, so a few people living well beyond what was expected won't bankrupt the company.

Finally there is the “middle-man”, the agent or 3rd party that transacts the annuity contract by connecting you with the company. They are usually paid a commission, by the company, off the total assets involved.

What’s the point of an annuity?

For companies, the purpose of the annuity is to make money off the sums and fees placed in and associated with the instrument. Their actuaries are great at predicting how long most people will live for, and will simply structure the product according to that information so they can make a profit. Obviously they’re not always correct, but by balancing insurance policies with annuity policies these companies can still regularly come out with a profit, even if they are wrong sometimes.

The goal of an annuity, for the purchaser, is to have a regular stream of income over some set period of time. Usually this is for the purpose of having an income for retirement. Ideally this sum of money will be worth more than the money you originally put in.

You can read more about how the math works for annuities over here, as well as the different types of annuities over in this article

If an annuity sounds of interest to you, or you have any more questions, give me a call at 203-956-0289. You can also send me an e-mail to Hope to hear from you soon!

Annuities are long term investment vehicles designed for retirement purposes. The guarantees of an annuity contract, including fixed returns, pay outs and death benefit guarantees are contingent on the claims paying ability of the issuing company Distributions maybe subject to regular income tax and a 10%penalty if taken prior to age 59 ½.