Annuity Definition, What is an Annuity

An annuity definition, in relative terms, should always explain exactly what annuities are. While an annuity can be a few different things, there are basic parts that are all the same. Understanding the definition of an annuity is at the heart of understanding annuities as well as how annuities work.

Since all financial transactions are theoretical in nature until they actually happen this makes sense. Whether or not the transaction is profitable or successful is not part of this discussion.

Annuity refers to any terminating stream of fixed payments over a specified period of time. An example would be receiving a monthly check for your lifetime. Annuity products fill that bill like a hand in a glove.

Fortunately for the consuming public insurance companies understand this principle. All you have to do is look at Symetra annuities, Aviva annuities or North American annuities and you will see how your deposits are converted into fixed payments over a period of time.

The value of the stream of payments will be computed using the time value of money, interest rate and future value of the deposit. The longer you have your money on deposit, at least in theory, the larger the payment stream.

Most people don‘t think of regular deposits to a savings account, monthly home mortgage payments or monthly insurance payments as examples of annuities. But, they fit the classic definition of annuity. A natural person doesn’t have to be the recipient of the payment for a transaction to be classified as an annuity.

An annuity‘s classification isn‘t strictly part of the definition. However, it does come into play. An annuity takes into consideration payment dates. The payments, also referred to as deposits, may be made weekly, monthly, quarterly, yearly, or at any other interval of time.

With regard to payments, there are two types. One is an ordinary annuity and the other is an annuity-due. As you might expect, the payment period differs from one to the other.

An ordinary annuity is also referred to as annuity-immediate. It is an annuity whose payments are made at the end of each period whether the period is a week, month, or year.

Annuity-due payments are made at the beginning of each period. Common examples of annuity-due payments are rent payments and insurance premiums.

Again, these are an ancillary part of annuity definition in that they are an integral part of finance theory. After all, by default, payments can only be made at the beginning or end of the period.

This annuity definition although grounded in finance theory is the nuts and bolts of an annuity and how it works. Understanding this annuity definition makes it easier to decide what type of annuity fits your portfolio.

For more information on annuities try:

Annuities Explained, an Explanation of Annuities

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