To define annuity in the simplest of terms, it is a payment made over a fixed period of time. Examples of an annuity would be regular deposits to a savings account, monthly insurance payments and also house mortgage payments. The time period between the payments is called the annuity period. The annuity period can be anywhere between a week, a month, a year to a few years. An ordinary annuity is one whose payment is made at the end of each period.
Given the choice, we would always prefer having the money now than later. It is normal instinct. Why is that so? Why do people want it at this very moment instead of three years from now? The reason is that you can do much more with the money now than later. For example if you receive Rs.10,000 now rather than three years later you could earn some interest with it, or you could invest it in something. By this we increase the future value of our money. How you ask?? Its simple really, suppose you invest the money right now then after three years of investing you will get not only your original money but you will also get the interest money along which will increase your future value of the money.
In an annuity you receive back a sum every year, every half-year or every month either for life or for a fixed period of time. After the death of an annuitant, or when the fixed period for annuity expires the full amount is given back perhaps with a small additional amount.
An annuity would differ from all other life insurances in one fundamental way that is, it does not provide life insurance cover but it does provide a guaranteed income for life or for a specified period.
Typically an annuity is used to generate income in one’s retired life which is why they are also called �pension plans’. Annuity payments are fixed with reference to the duration of a person’s life. They offer income that you cannot outlive and they provide an answer to one of the biggest problems of our age, i.e. the insecurity of old age of outliving one’s income.
So by buying an annuity you get guaranteed income throughout your life and also tax benefits are available. A retired individual who has received a large amount of money from a provident fund should invest the money in a pension plan or annuity fund because it is a sure and safe way of providing income for the rest of the individual’s life. You can pay the annuity funds all at once or at installments which are mostly annual.
There is something called the life annuity which basically gives you a specified income for life and on death refunds the money back to your estate. There is then the guaranteed period annuity which gives you an amount for specified number of years even if you die earlier, suppose you outlive that time it will still keep giving you the amount. Then there is the annuity �certain’ in which you get paid only for a fixed number of years no matter how much longer you may life.
So its advisable from a young age to think about annuities and all its benefits so you can probably have the time of your life in a place like Las Vegas in your old age while other people are enviously watching!!
