Classification of Annuities

The ordinary annuity contract is an agreement whereby the company promises, in return for a cash payment made in advance, to pay the annuitant while living an agreed amount annually, semi-annually, or quarterly, such payments to cease whenever death occurs. The purchase of an annuity therefore represents the purchase of a fixed income, and the general purpose of the contract is seen to be the reverse of that accomplished under life insurance.

As was the case with life-insurance policies, annuities may be of various kinds. The annuity may be one for the whole of life (a life annuity) or merely for a stipulated term (a term annuity). Sometimes it is provided that a stated minimum number of annuity payments shall be made under any circumstances, as, for example, that at least ten annual payments are guaranteed although the annuitant may have died before the expiration of that time. So-called "deferred annuities" may also be granted for the purpose of enabling the purchaser to provide an income for himself at some future time, and the purchase price of suck an annuity may take the form of a single premium at the time of purchase, a level premium during the entire time between the date of purchase and the commencement of the annuity, or the payment of a limited number of premiums under the limited premium payment plan. Under the ordinary annuity, the first annuity is usually payable three, six, or twelve months following the date of purchase, whereas under the deferred annuity the payments do not begin until the purchaser reaches a certain age, such as twenty or thirty years following the age at purchase. Should death occur during this twenty- or thirty-year period, no refund of the premiums or purchase price is ordinarily made; although it is entirely feasible under the deferred annuity plan to provide that in case of death before the annuity payments begin, the premiums which may have been paid shall be refunded to the heirs of the purchaser. It should also be stated that two persons, such as husband and wife, or two sisters, may purchase an annuity payable to them jointly while both live and also continuing during the lifetime of the survivor. As has been well stated: "By this means an income is provided as long as the survivor of the two can possibly require it. The same principle may, of course, be extended to three or more lives, but the circumstances are rare when such annuities are desirable, while for two lives it is a common form of contract".