ANNUITY (from Lat. annus, year). .\ sum of money paid annually. If perpetual, the right to receive the payment passes from the annui tant to his heirs. Such perpetual annuities are less frequent than life annuities, which may as sume the most varied forms. In the simplest phase of the matter the annuitant receives a fixed annual payment during his life, the annuity being extinguished by his death. If upon the lives of several persons, the aggregate amount of the annuity only is fixed. On the death of one of the recipients, his share is distributed among the survivors, the last person receiving the whole amount which was formerly distrilmted. The annuity may begin immediately and stop upon the happening of some contingency, as marriage; or again, the annuity may not begin until a later date, in which case it is designated as deferred. Many other combinations can be and actually are devised. Such annuities arise either from testa mentary dispositions or from contract. In the former ease it is the desire of the testator to in sure to the recipient an income fixed in amount either for life or for a lesser period. Thus, a father may provide an annuity for his daughter, to be terminated upon marriage. In case of an annuity resting upon contract, the annuitant or some one for him, surrenders the use of a sum of money to another person who agrees to make fixed annual payments to the annuitant during the life of the latter. The annuity may he pur chased by a single payment or a series of pay ments extending over a number of years. The latter is particularly applied to old age insur ance, the object of which is to secure a fixed an nual income after reaching a certain age. Such a contract between two individuals would be little more than a wager. No one can tell how long an individual may live, and one of the par ties to the contract must gain at the expense of the other. When, however, the business is con centrated so that the party paying the annuities deals with a large number of persons, the same laws that make life insurance possible make this a calculable and legitimate enterprise. The relations of life insurance and annuities are obvious. They arc reciprocals of one another.
In life insurance a series of annual payments oh tains for the insured certain capital at death, while in annuities the surrender of a certain capital insures a series of annual dur ing life. Annuities are, in fact, older than life insurance, and the latter is an offshoot of the former.
The elements in the calculation of the rates ot annuities are the same as in life insurance, though the calculation is a different one. The first element is the probability of human life, as determined by vital statistics. Upon the length of human life depends the number of payments, and for a given capital, therefore, the amount ot such payments. It is obvious that the sum of $1000 would purchase a larger annuity for a man of fifty than for one of twenty-five. It is equally clear that for a series of contracts once entered upon, a lengthening of the average period of human life would cause pecuniary loss to those paying the annuities. while a shortening of hu man life, would cause a profit. Like results have frequently followed frinn undertaking annu ity contracts upon an erroneous statistical basis. The second element. in the case is the interest upon money. If the money surrendered at the outset were locked up in a strong box. the cal culation of the payment for a fixed munher of years would be simplicity itself. In that case an annuity of $1 for ten years could not he pur chased for less than $10. But. the purchase money is, in fact, placed at interest. and under the terms of the contract ahove noted. the seller of the annuity would enjoy the interest on $10 for one year, on $9 for the second year, and so on. The purchaser, however, will not surrender his entire claim to interest, hut will at least share it with the seller. It follows, therefore, that an annuity of $1 for ten years should be purchased for something less than $10. Slow much less. will depend upon the rate of interest. If interest were six per cent., the annuity could be purchased more cheaply than if it were only three per cent. Changes in the rate of interest complicate the practical problem of executing annuity contracts.