An annuity is series of periodic payments made at regular, fixed intervals, such as a contract with an insurance company to provide a steady income stream in retirement. Although the word stems from the Latin annus, meaning “year,” the most common annuity payout interval is monthly. Company and government pension plans are a type of annuity; Social Security is also a form of annuity, as employees pay into the program throughout their working years (with half the money coming from employers) and, once they reach retirement age, may begin receiving a monthly benefit for the rest of their life.
There are two main classes of annuities:
- Annuities certain. Under an annuity certain, the payments are to continue for a specified number of payments, and calculations are based on the assumption that each payment is certain to be made when due. For example, a multiyear guaranteed annuity (MYGA) offers compound, fixed-rate growth over the life of the annuity, typically between three and 10 years.
- Contingent annuities. With a contingent annuity, each payment is contingent on the continuance of a given status. In a life annuity, for example, in exchange for an up-front payment or series of payments (the “accumulation” period), once payments to the annuity holder begin (the “annuitization” phase), payments continue for the rest of the holder’s life. In other words, each payment is contingent on the survival of the annuity owner.
A special case of the annuity certain is the perpetuity, which is an annuity that continues forever. Perhaps the best-known example of a perpetuity is the interest payment on the British government bonds called consols. Because these obligations have no maturity date, it is intended that the interest payments will continue indefinitely.
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The contingent annuity used in life insurance and pension plans depends on the concept of risk sharing. The price of an annuity that pays a given sum for life is based on the life expectancy of the annuitant at the time the annuity is to begin. In effect, the annuitant joins with a large number of other persons of the same age in establishing a fund that is calculated, on the basis of mortality tables, to be sufficient to pay each person the agreed income for life. Some will live longer than others and receive more in payments than they have put into the fund, whereas others will not live long enough to receive all that they have put in. The risk-sharing principle makes it possible to purchase an annuity that guarantees much higher payments than could be obtained if the same sum of money were invested at interest. It has the disadvantage that upon the death of the annuitant, nothing is left for their heirs.
Immediate and deferred annuities—typically purchased from an insurance company—are designed to provide a steady income stream in retirement, but choosing one can be complicated. Some come with fixed payments, while others may be variable, based on the performance of the investments (or may be tied to the performance of a stock index such as the S&P 500). And then there are riders—add-ons and other contingencies—to tailor the annuity to your exact needs. But each rider comes with a fee that will either add to the up-front cost or reduce the annuity payments.
moneyinsurancebankFinance & the EconomyFinance Basics
exchange rate
finance
Also known as: currency exchange rate
Written and fact-checked byThe Editors of Encyclopaedia Britannica
Article History
Exchange rates displayed at Suvarnabhumi International Airport, Bangkok, Thai.
exchange rate, the price of a country’s money in relation to another country’s money. An exchange rate is “fixed” when countries use gold or another agreed-upon standard, and each currency is worth a specific measure of the metal or other standard. An exchange rate is “floating” when supply and demand or speculation sets exchange rates (conversion units). If a country imports large quantities of goods, the demand will push up the exchange rate for that country, making the imported goods more expensive to buyers in that country. As the goods become more expensive, demand drops, and that country’s money becomes cheaper in relation to other countries’ money. Then the country’s goods become cheaper to buyers abroad, demand rises, and exports from the country increase.
World trade now depends on a managed floating exchange system. Governments act to stabilize their countries’ exchange rates by limiting imports, stimulating exports, or devaluing currencies.
This article was most recently revised and updated by Amy Tikkanen.
gold rusheconomic growtheconomicsFinance & the EconomyEconomic Concepts
expansion
economics
Written byPeter Bondarenko
Fact-checked byThe Editors of Encyclopaedia Britannica
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expansion, in economics, an upward trend in the business cycle, characterized by an increase in production and employment, which in turn causes an increase in the incomes and spending of households and businesses. Although not all households and businesses experience increases in income, their greater confidence about the future during an expansion prompts them to make larger purchases and investments.
During an economic expansion, increases in output are mostly the result of increases in the purchases of durable goods by consumers and of machinery and equipment by businesses. Consumer and business confidence fuels the demand for products and services. As demand grows, businesses add to their inventories to ensure that they will be able to keep up with new purchase orders. The decision to increase inventories often has an additional impact on production volume, above and beyond the increase in actual sales.
Whether an expansion is sustainable for a long period of time depends on a number of factors. Among them are the extent and quality of credit provided by banks and other financial intermediaries, the existence of appropriate monetary and fiscal policies to support the upward trend, the total production capacity across industries and the portion of it that has been used, and external factors that could influence energy prices or other components of production.