In an annuity contract, you pay a large lump sum now for regular payments at some point down the line. Usually, the product provides income during retirement. You write a check for $100,000 now. Twenty years from now, you start receiving $1,500 a month, with the payments lasting either for a set period of time or until you kick the bucket, depending on the structure of the annuity.
Most annuities are sold by insurance companies. A private annuity uses the same general framework, but it's an individual deal between two parties.
You own an old age home catering to retired circus clowns. You're getting to the point where you might become a resident in the near future (you've got some clowning days in your past, so you're eligible). You want to hand the business over to your daughter. However, you don't actually want to end up living at Bozo Estates. You'd like to keep receiving income checks so you can afford to live in your own house.
So you and your daughter set up a private annuity. You give her the retirement home. She agrees to keep sending you an income check every month from now until you go to the big clown car in the sky.
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Finance: What is Perpetuity?44 Views
finance a la shmoop. what is a perpetuity? forever. that's what you should think
when you hear the word perpetuity. well a perpetuity is a cousin to an annuity.
in an annuity you invest a given amount of money and then you get a portion of [100 dollar bill]
that dough paid out to you over a set number of years, or in the vein of a life
insurance policy it gets paid out until you are you know doing backstroke Six
Feet Under. and annuity sunsets well basically when you. do but a perpetuity [skeleton in the ground]
outlives you. it pays forever even when you're dead. so why would anyone want one
of these things? well they work for university scholarship endowments. you
know like think about a great Italian literature philanthropist named well
let's say Bella pepperoni. no offense to our Italian shmoopers out there. she made [woman wears name tag]
her fortune analyzing the works of Dante and Machiavelli and wants to endow a
scholarship for other PhDs in Italian Lit forever. well she'd put in say a
million bucks and it might get invested in half and bonds half in stocks with
yield and the throw from that million bucks might be something like a four or
five percent a year or forty or fifty grand and that would be more than enough [equations on screen]
to cover the basics for a PhD in Italian lit well more or less forever as
dividends get raised in stocks bro and all that stuff. the million bucks just
remains invested 50/50 stocks and bonds and the world continues to spin so yeah
even when she's no longer around to enjoy the fruits of her labor as well [headstone shown]
that fruit doesn't spoil develop mold and start to smell bad even if we can't
say the same for her. sorry. just keeping it real. [woman's picture next to casket.]
that's perpetuity. goes forever. perpetual.
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Technically, an annuity is any kind of regularly scheduled payment, usually made annually, quarterly or monthly...for the life of the recipient. Ev...