Whether you know it or not, you’ve at least heard the word “annuity” thrown around.
Unconvinced? You’ve probably encountered annuities in the following instances:
- Defined benefit pensions. Defined benefit pensions guarantee specific benefits upon retirement. Employers can administer pensions in the form of a lump sum or lifetime annuity. Due to the fact that these are deposits to banks, the Federal Deposit Insurance Corporation (FDIC) supervises them instead of the Securities and Exchange Commission (SEC).
- Social security. Ultimately, Social Security is a government-backed annuity, much like an immediate annuity. Those over 65 will receive a guaranteed stream of income after paying into Social Security for at least ten years.
- Mega Millions. Lottery winners can choose between a lump sum or a payout with Mega Millions. Mega Millions pays out an annuity on a one-time basis. Then, twenty-nine annual payments are made, each five percent greater than the previous one.
- Powerball. Lottery winners can choose between a lump sum cash payout and a payout option when winning the Powerball jackpot. One payment Is paid immediately and then twenty-nine payments are made annually—each five percent larger than the previous one.
- Court settlement. In civil law, structured settlements are settlements that result from winning a case. Typically, settlements involve a one-time lump sum, followed by regular payments. These payments are distributed through an annuity.
