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What is Annuity?

Definition of Annuity

An Annuity is a contract between an individual and an insurance company whereby the individual can, either, deposit a lump sum payment or a series of payments and in return will receive regular disbursements that begin at the individual's behest. The purpose of an Annuity is to provide a continuous stream of income during periods of decreased revenue, for example retirement or unemployment. There are several different types of Annuities - comprising of fixed, variable and indexed - that each carry differing levels of risk and reward. Firstly; fixed annuities expend a guaranteed amount based upon the balance of a given account, which somewhat inhibits the individual's annual return; but it is also carries the least risk as the annual return is guaranteed, irrespective of any shifts in the market. Secondly; variable annuities allow for greater opportunity, but also carries the greatest levels of risk, as the return of an annuities is based upon the performance of investments in one's subaccount (that is a collection of mutual funds that an individual can choose). Thirdly; indexed annuities guarantee a minimum payout, however a percentage of the disbursement is tied to the performance of a market index.
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