Definition of Annuity

Annuity is a contract between an individual and an insurance company that is designed to provide the annuitant with lifetime income in exchange for either a lump sum or period deposits into the contract.

Applying "Annuity" to Securities Exams:

An annuity is a contract where an investor deposits money into an investment account and the money is allowed to grow tax deferred. An annuity is a non qualified account and money placed into the annuity is contributed after taxes have been deducted. That is to say, that an annuity is funded with after tax dollars. When the annuitant annuitizes the contract and begins to receive payments from the annuity, the investor’s cost base / deposits are returned to them tax free. The investor will pay taxes on the growth portion of the payment.

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