Annuity
What is an Annuity?
An annuity refers to the payment of regular amounts, such as a pension plan, where a person pays a certain amount in for a set time; then receives back a string of payments.
![an 1](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-1.jpg)
How it Works
An employee can take out an annuity, such as a defined benefit pension, with an insurance company.
![an 2](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-2.jpg)
Here, the employee pays a certain amount into the plan on a regular basis.
![an 3](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-3.jpg)
They continue doing this until a predetermined point in time is reached.
![an 4](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-4.jpg)
After this, the annuity pays a stream of payments.
![an 5](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-5.jpg)
It continues doing this until another point of time or situation is reached.
![an 6](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-6.jpg)
The period where payments are collected is referred to as the accumulation phase..
![an 7](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-7.jpg)
Once payouts begin, it is referred to as the annuitization phase.
![an 8](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-8.jpg)
Payout Options
The annuitization phase can be structured in a couple of different ways.
![an 9](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-9.jpg)
For example, annuities can be arranged so that payments will continue for as long as the annuitant or their spouse is alive.
![an 10](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-10.jpg)
Alternatively, they can be structured to provide a stream of payments for a fixed period of time.
![an 11](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-11.jpg)
Fixed Annuity
A fixed annuity provides a regular, periodic payment to the annuitant.
![an 12](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-12.jpg)
A variable annuity, on-the-other hand, has variable payout options.
![an 13](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-13.jpg)
Over the years, annuity payments are invested in a fund of some kind—equity, bonds, or property..
![an 14](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-14.jpg)
With a variable annuity, if the fund performs well, the payments will be high.
![an 15](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-15.jpg)
If the fund performs poorly, on-the-other hand, payments will be lower.
![an 16](https://seeaccountingnow.online/wp-content/uploads/2021/08/an-16.jpg)
© R.J. Hickman 2020