Annuities

Annuities are financial instruments primarily used for retirement planning that combine elements of insurance and investments into one contract. In its simplest sense, the annuity contract is the opposite of a life insurance contract; whereas a life insurance contract protects against the possibility of untimely death, the annuity is designed to protect the client from living too long. Annuities are categorized in several different ways based on the frequency of contributions, the date distributions begin, and the investment options chosen. Due to the complexity, wide availability, and potential controversy of annuities, financial planners must be intimately knowledgeable about the various forms of annuity contracts. This chapter helps the students to explain the characteristics of an annuity including contribution and distribution options and differentiating between immediate and deferred annuities. It also helps them to compare and contrast annuities (fixed and variable) with other investment alternatives, including an analysis of costs, contract terms, and taxation.