Understanding an Annuity Contract

by Investing School on June 20, 2012

The key to understanding an annuity contract is recognizing that it is an agreement between a customer and an insurance company. The goal of said contract is to define the obligations each party holds regarding the annuity. Details may include the structure of the annuity, penalties for early withdrawal or termination and provisions made for a spouse through the means of a survivor clause.

An annuity contract can act as a type of investment designed to pay the annuitant monthly payments until the individual has passed on. Annuity contracts fall into two categories: deferred and immediate. Deferred annuities delay the payment of income until the investor wants to receive it, and an immediate annuity is purchased with one payment and has a defined payment schedule that begins right away.

A relative newcomer on the annuity stage is the charity annuity contract. This tool allows investors to donate a lump sum to a charity of their choice and guarantee a certain annual income for life. As icing on the cake they also get a tax deduction when they purchase the annuity. Just as in other annuity products, the investor receives an agreed upon income for the rest of their life and the remainder of the funds go to the specified charity.

Two other things to note about annuity contracts. On the good side, some offer a bonus for a certain period of time. That means that any funds deposited into the annuity during that bonus time will be matched by a certain percentage on top of the annual return. A con with annuity contracts is that some carry heavy surrender charges. These charges must be paid if the investor changes their mind during the defined no-surrender period.

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