Facts + Statistics: Annuities

Annuities

Annuities are contracts in which one party agrees to make a series of payments to another party at a future date, typically in exchange for a lump sum of money at the time of the agreement. Individuals may purchase an annuity directly from a life insurer or through an intermediary, such as a broker, financial advisor, bank, or other qualified distributors, but the insurer holds and guarantees the contract.

Fixed and variable annuities

Annuity purchasers can customize contracts to fit financial goals, but most annuities will fall into three categories: fixed, variable, or indexed. Fixed annuities guarantee the principal and offer a minimum rate of interest, typically based on the yield from investments an insurer may hold, such as bonds or other fixed-income investments. Variable annuities have rates tied to the performance of a selected portfolio of stocks and, therefore, may fluctuate with the market. Indexed annuities combine features of fixed and variable annuities by offering a minimum rate plus a rate tied to the movement of a specified stock index. The main benefit of an annuity, the income stream, can be useful in financial planning for retirement or leaving a legacy (with a death benefit rider). Deferred annuities generally accumulate assets over a long period of time, with withdrawals taken as a single sum or as an income payment beginning at retirement. Immediate annuities allow purchasers to convert a lump-sum amount into a stream of income that starts right away. Annuity issuers can write annuities on an individual or group basis (e.g., benefits for employer-based retirement programs). Annuities can also disburse lottery winnings or structured settlements, legal arrangements in which an injury victim in a lawsuit receives compensation over time rather than as a lump sum. Annuities can be used to fund structured settlements, arrangements in which an injury victim in a lawsuit receives compensation in a number of tax-free payments over time, rather than as a lump sum.

Premiums by line

Measured by premiums written, annuities are the largest life/health product line, followed by life insurance and health insurance (also referred to in the industry as accident and health). Life insurance policies can be sold on an individual, (“ordinary”) basis or to groups such as employees and associations. Accident and health insurance includes medical expense, disability income and long-term care. Other lines include credit life, which pays the balance of a loan if the borrower dies or becomes disabled, and industrial life, small policies whose premiums are generally collected by an agent on a weekly basis.