Tax Facts

495 / What is an “annuity”?

Strictly speaking, the term “annuity” refers to a series of payments over time in which the principal (or purchase price) and interest are amortized over the payout period, so that no value remains at the end of the annuity period; it is a stream of income. However, most people who use the term “annuity” are referring to an annuity contract, under which that stream of income is guaranteed.


There are several types of annuity contracts: (1) commercial annuities, which are contracts between a purchaser and an insurance company, (2) charitable gift annuities (see Q 607), and (3) private annuities (see Q 603). With the exception of Q 603 to Q 609, all of the discussion in this book will deal with commercial annuities.

There are many types of commercial annuities and they are very different because they are designed to do very different jobs. For this reason, any statement that begins “Annuities are….” is probably misleading or outright false, precisely because the term covers so many different types of contract.

The chart below shows the various types, in terms of when annuity payments begin.1



The following chart shows these types in terms of how the contract value is invested.







1.     Chart from “John Olsen’s Guide to Annuities for the Consumer” (John L. Olsen, 2015), by permission.


Tax Facts Premium Tools
Calculators
100+ calculators specifically designed to help you easily assist clients with specific planning situations and calculations.
Practice Guidance
Designed to help you discover new ways for which to build and maintain client relationships.
Concepts Illustrated
Specifically designed to help you easily assist clients with specific planning situations and calculations.
Tax Facts Archives
Access to the entire library of Tax Facts dating back to 2012 allowing you to look up the exact tax figures from prior years.