What is an Annuity?

The very first annuity in the US can be traced back in 1740, when Presbyterian Church provide the benefits to the clergy and widows. Today, annuity is an insurance product established with the purpose to pay out income to the annuitant (the person who owns the annuity plan) when he stop working. Annuity is commonly use as a financial tool in retirement planning. As life expectancy increases, humans are expected to live longer. For that reason, people take up annuity plan to protect themselves from outliving their own assets.

How does an annuity work? As an annuitant, you invest your money now in the annuity plan. There are two kinds of payout, immediate and deferred. In immediate payout, you will receive the income as soon as you purchase the policy, while in deferred payout, the income will be paid at a later date. You can choose to receive your payout in three modes: monthly, quarterly, or annually. There are basically two types of premium payment, in a lump sum (single premium) or by instalments (regular premium). Unlike life insurance, no medical examination is required when you purchase the annuity policy. The size of the income payment differs, depending on various factors:

• The size of the premium paid. Usually, the higher the premium paid, the higher the income you may get in the future.

• The types of annuity you take up. Fixed Annuity offers guaranteed payout regardless of market situations while Variable Annuity is more towards performance based. The better the investment performances, the higher Variable Annuity pays.

• The payout period of annuity income. If you choose to receive your income for your lifetime the amount will be different from if you choose to receive it in certain number of years.

All the earnings of an annuity are tax deferred until they have been received by the annuitant.  The policy will be terminated upon demise of the annuitant.

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