Annuity An annuity is a contract between an insurance company and a buyer. The buyer pays a premium, in one or several payments, and the insurance company agrees to pay the buyer a regular return for a specified period of time, usually the remainder of the buyer’s lifetime. The insurance company invests the money to earn interest, receive dividend income, or collect capital gains distributions. The insurance company then pays the buyer an income based on the terms of the contract. Annuities can be variable or fixed, deferred or immediate. A fixed annuity ensures that the insurance company will pay a set principal plus a set interest rate. Returns on a variable annuity, however, fluctuate based on the performance of the investments. With a deferred annuity, the premium gathers interest for a certain set period of time, tax-free, before payments to the buyer begin. Immediate annuities, on the other hand, establish a return for the buyer based on the buyer’s age, part of which is considered principal and part of which is considered taxable interest. Thus, age, wealth, and risk tolerance will heavily influence the type of annuity an individual buyer selects.
Asset Assets include any of an individual’s possessions that have exchange value. Examples of assets include stocks, bonds, cash, real estate, and other properties.
Asset Allocation Asset allocation refers to the specific distribution of funds among a number of different asset classes within an investment portfolio. Asset classes such as stocks, bonds, and real estate have unique types of expected risk and return. Within each asset class are several variations of the asset, meaning that there are levels of risk within each asset class. Asset allocation involves determining what percentage of funds will be invested in each asset. The investor's goals, time frame, and risk tolerance will all affect how an investor wishes to allocate funds.