Annuity vs. Amortization — What's the Difference?
By Tayyaba Rehman — Updated on November 2, 2023
An annuity is a series of equal payments at regular intervals, while amortization is the process of spreading out a loan into a series of fixed payments.
Difference Between Annuity and Amortization
Table of Contents
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Key Differences
An annuity represents a financial product that pays out a fixed stream of payments to an individual, typically used as an income stream for retirees. It's a contract between an individual and an insurance company, where the individual pays a lump sum or a series of payments in exchange for regular disbursements that may start either immediately or at some point in the future.
Amortization, in contrast, is a method for paying off both interest and principal on a loan, gradually reducing the balance over the life of the loan. It is commonly used in installment loans like mortgages and car loans. The payments are divided into the amount that goes towards interest and the amount that goes towards reducing the principal balance.
An annuity is designed to protect against the risk of outliving one's income, guaranteeing steady cash flow for a certain period or for the annuitant's lifetime. In terms of financial planning, annuities are often used to provide a stable income during retirement, offering peace of mind that there will be a consistent payment regardless of market conditions.
Amortization, on the other hand, is a calculation that determines the loan payment amount at certain intervals based on the principal amount borrowed, the interest rate, and the term of the loan. This process ensures that by the end of the loan term, the loan will be paid off in full, assuming all payments are made as scheduled.
Although annuities can have an amortization schedule if they include a provision to pay out the invested capital along with the earnings, the term "amortization" is specifically used in the context of loans. Annuities focus on providing an income, while amortization focuses on debt reduction.
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Comparison Chart
Purpose
To provide income
To reduce debt
Payment Direction
From insurer to individual
From borrower to lender
Nature of Payments
Income received by the annuity owner
Payments made by the loan borrower
Financial Product Type
Insurance and investment product
Loan repayment method
Interest Component
Interest may be part of payments received
Interest is part of payments made
Compare with Definitions
Annuity
Deferred annuities begin payments at a future date.
Their deferred annuity will start payments when they turn 65.
Amortization
Negative amortization occurs when payments don't cover interest due.
Their loan had negative amortization in the early years.
Annuity
An annuity is a financial product that guarantees regular payments.
She bought an annuity to secure her retirement income.
Amortization
Amortization is the process of paying off a debt over time.
Their mortgage amortization is over a 30-year period.
Annuity
Fixed annuities offer payments of a set amount.
Their fixed annuity disburses $500 monthly.
Amortization
Amortization schedules are common for fixed-rate loans.
He printed the amortization schedule for his car loan.
Annuity
Immediate annuities start payments almost right after purchase.
They opted for an immediate annuity for instant income.
Amortization
Amortization reduces the loan balance to zero by the end of the term.
The final amortization payment settled her student debt.
Annuity
Variable annuities allow investment in securities.
His variable annuity is tied to the stock market performance.
Amortization
Amortization (or amortisation; see spelling differences) is paying off an amount owed over time by making planned, incremental payments of principal and interest. To amortise a loan means "to kill it off".
Annuity
An annuity is a series of payments made at equal intervals. Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments.
Amortization
The act or process of amortizing.
Annuity
The annual payment of an allowance or income.
Amortization
The money set aside for this purpose.
Annuity
The right to receive this payment or the obligation to make this payment.
Amortization
In reckoning the yield of a bond bought at a premium, the periodic subtraction from its current yield of a proportionate share of the premium between the purchase date and the maturity date.
Annuity
A contract or agreement by which one receives fixed payments on an investment for a lifetime or for a specified number of years.
Amortization
The reduction of loan principal over a series of payments.
Annuity
A right to receive amounts of money regularly over a certain fixed period, in perpetuity, or, especially, over the remaining life or lives of one or more beneficiaries.
Amortization
The distribution of the cost of an intangible asset, such as an intellectual property right, over the projected useful life of the asset.
Annuity
A sum of money, payable yearly, to continue for a given number of years, for life, or forever; an annual allowance.
Amortization
The act or right of alienating lands to a corporation, which was considered formerly as transferring them to dead hands, or in mortmain.
Annuity
Income from capital investment paid in a series of regular payments;
His retirement fund was set up to be paid as an annuity
Amortization
The extinction of a debt, usually by means of a sinking fund; also, the money thus paid.
Amortization
The reduction of the value of an asset by prorating its cost over a period of years
Amortization
Payment of an obligation in a series of installments or transfers
Amortization
Each amortization payment includes interest and principal.
This month's amortization covered more principal than interest.
Common Curiosities
Can annuities lose value?
Variable annuities can lose value if the investments do poorly.
How do you calculate amortization?
Amortization is calculated using the principal amount, interest rate, and loan term.
What types of annuities are there?
There are fixed, variable, and indexed annuities.
What's a negative amortization loan?
It's a loan where the payments don't cover the interest cost, increasing the balance.
Can you sell an annuity?
Yes, but you may incur fees or receive less than the full value.
Are annuities taxed?
Annuity payments are taxed as income when distributed.
Do annuity payments affect Social Security?
They can, as income may affect taxation of Social Security benefits.
Can amortization schedules change?
Yes, with a refinance or a change in interest rates for adjustable-rate loans.
What happens to an annuity when you die?
It depends on the type of annuity; some offer death benefits to beneficiaries.
Does amortization apply to interest-only loans?
No, interest-only loans do not amortize during the interest-only period.
How does a deferred annuity work?
It accumulates money now for payments to begin at a future date.
Is amortization the same as depreciation?
No, amortization is for debt; depreciation is for tangible assets.
Can you pay off a loan early on an amortization schedule?
Yes, but check for prepayment penalties with your lender.
Is there a penalty for early withdrawal from an annuity?
Yes, early withdrawal can lead to penalties and taxes.
Are annuities protected from creditors?
This varies by state law and the type of annuity.
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Written by
Tayyaba RehmanTayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.
