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Up to this point, you've focused on life insurance products that pay a benefit when someone dies. This chapter turns that idea around: annuities are contracts built to protect a person against outliving their own money, converting a sum of savings into a stream of income that can last for the rest of that person's life. Annuities are not life insurance — they are a distinct financial vehicle aimed at accumulating funds and then liquidating them into an income stream. By the end of this chapter, you'll be able to describe the roles an annuity contract assigns to its owner, annuitant, and beneficiary; tell apart the major ways annuities are classified — immediate versus deferred, fixed versus variable; and recognize the situations where each type of annuity is put to its best use.
| Term | Definition |
|---|---|
| Deferred | Postponed or withheld until a specified future time or event |
| IRS | The Internal Revenue Service — the federal agency responsible for collecting taxes and enforcing the Internal Revenue Code |
| Life contingency | A condition whose outcome depends on whether a particular person is alive or has died |
| Liquidation of an estate | Converting a person's accumulated net worth into a stream of cash income |
| Natural person | A living human being, as distinct from a corporation, trust, or other legal entity |
| Qualified plan | A retirement plan that satisfies IRS requirements and therefore receives favorable tax treatment |
| Suitability | The requirement that a recommended insurance or investment product actually fit a particular customer's needs and circumstances |
Terms to Know