Legal Definitions - annuity insurance

Annuity insurance is a financial contract, typically offered by an insurance company, designed to provide a steady stream of income payments to an individual, often for the rest of their life. In essence, an individual pays a sum of money (either as a single lump sum or a series of payments) to the insurance company. In return, the company promises to make regular, periodic payments back to the individual, starting at a predetermined future date and continuing for a specified period, most commonly for the duration of the individual's life.

Here are some examples illustrating how annuity insurance works:

• Retirement Income Planning: Sarah, a 55-year-old professional, is planning for her retirement. She has accumulated a significant amount in her savings and wants to ensure she has a guaranteed income stream that she cannot outlive. She decides to purchase an annuity policy, paying a lump sum to an insurance company. The policy is structured so that when she turns 65, the insurance company will begin making monthly payments to her, which will continue for the rest of her life, regardless of how long she lives. This provides her with financial security and peace of mind during her retirement years.

  This illustrates annuity insurance because Sarah makes a payment to an insurance company, and in return, she receives guaranteed periodic payments that begin at a fixed future date (age 65) and continue for her lifetime.

• Managing a Legal Settlement: David was awarded a substantial sum in a personal injury lawsuit. Instead of receiving the entire amount as a lump sum, which he worried he might mismanage, his lawyer suggested using a portion of the settlement to purchase an annuity. This annuity was set up to provide David with quarterly payments for the next 20 years, helping him cover ongoing medical expenses and living costs without the risk of depleting his funds too quickly.

  This example demonstrates annuity insurance as David uses a large sum (from his settlement) to fund a policy that provides him with regular, periodic payments (quarterly) over a fixed period (20 years), ensuring a predictable income stream from a future date.

• Estate Planning for a Dependent: Maria wants to ensure her adult son, who has special needs, will always have a reliable source of income after she passes away. She purchases an annuity policy and names her son as the beneficiary. The terms of the annuity specify that upon Maria's death, the insurance company will begin making monthly payments directly to her son, which will continue for the remainder of his life. This arrangement provides long-term financial support and stability for her son.

  This scenario highlights annuity insurance because Maria invests in a policy that, upon a specified event (her death), triggers regular, periodic payments to her son, continuing for his lifetime, thus providing a guaranteed income stream.