What Is an Annuity Payment?

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An annuity payment is received at specific intervals.
An annuity payment is received at specific intervals. (Image: counting money image by Albert Lozano from Fotolia.com)

There are numerous types of annuities. Leases and rental payments are two examples. In both types, though, a specific amount of money is due to be paid or received at specific intervals, say every week, every month, quarterly or annually. Annuities are usually paid or received over a defined period of time. Another type of annuity is a life annuity.

Life Annuities

A life annuity is different from other annuities in that it usually ends when the person receiving the payments dies. Many people buy annuities to give them a steady stream of income during retirement. These types of annuities are really financial contracts. They are often sold by insurance companies.

Generally, you would make a one-time or lump-sum payment or regular payments to the insurance company to fund the annuity. Common types of life annuities are: Fixed and variable annuities; guaranteed annuities; joint annuities; and impaired life annuities.

Life annuities are often used to provide retirement income.
Life annuities are often used to provide retirement income. (Image: retiree image by GiGiZ from Fotolia.com)

Fixed and Variable Annuities

Owners of fixed annuities receive the same amount of money every period. In some cases, the amount might increase based upon a percentage specified by the contract.

Variable annuity payments will probably change in amount, based upon the performance of the bonds and mutual funds in which the annuity funds are invested.

Variable annuity payments vary based on investment performance.
Variable annuity payments vary based on investment performance. (Image: stock market analysis screenshot image by .shock from Fotolia.com)

Guaranteed Annuities

Some people might not live long enough to recover the money they invested in an annuity. A guaranteed annuity provides payments to the person's family or estate for a specified time, even if the annuity owner dies. If the annuity owner outlives the specified time period, he or she will continue to receive payments.

There is a trade-off, however. Generally, the payment is lower to offset the insurance company's greater risk.

A surviving spouse may continue to receive annuity payments for a time.
A surviving spouse may continue to receive annuity payments for a time. (Image: old woman image by Alexander Raths from Fotolia.com)

Joint Annuities

The two most common type of joint annuities are joint-life and joint-survivor. With these types of annuities, payments can be made to married couples. Payments might stop upon the death of one spouse or both.

With joint annuities, payments may be made to married couples.
With joint annuities, payments may be made to married couples. (Image: The husband and the wife show gentle feelings to each other. image by Stanislav Komogorov from Fotolia.com)

Impaired Life Annuities

You could qualify for an impaired life annuity if you have a health problem that threatens to cut short your life. Conditions include cancer, diabetes, asthma, heart condition and high blood pressure. Because your life might end prematurely, these annuities usually pay you more.

A health problem might qualify you for an impaired life annuity,
A health problem might qualify you for an impaired life annuity, (Image: The doctor and the patient image by Vladimir Usatschenko from Fotolia.com)

Do Your Homework

Before you buy an annuity, do your homework. Calculate how much your payment would be. Buy annuities only from reputable and financially strong companies. In addition, make sure the returns being promised can be verified. Also, find out what you will be charged in expenses, commissions and fees.

Another important consideration is surrender value. Say you decide to cancel the annuity and get your money back. What will you be charged to do this?

Do your homework before selecting an annuity.
Do your homework before selecting an annuity. (Image: OLYMPUS DIGITAL CAMERA image by jumedero from Fotolia.com)

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