Annuity Insurance

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How Are Annuities Different From Life Insurance?

	Life Insurance		Annuities
	Term life	Whole life	Deferred annuities	Immediate annuities
Main reason for buying it	Provide income for dependents	Provide income for dependents or meet estate planning needs	To accumulate money in a tax-deferred product	To assure you don’t “outlive your income”
Pays out when	You die	You die, borrow the cash value or surrender the policy	You make withdrawals	One period after you buy the annuity, stops paying when you die*
Typical form of payment	Single sum	Single sum	Single sum or income	Lifetime income
Buyer’s age when it is typically bought	25-50	30-60	40-65	55-80
Accumulates money tax-deferred?	No	Yes	Yes	Yes, but only in the early payout years
Pays a death benefit?	Yes	Yes	Yes	*payments continue if the annuity has a guaranteed-period option that hasn’t expired at the annuitant’s death
Are benefits taxable income when received?	No	No, unless a cash value withdrawal exceeds the sum of premiums	Yes, but only the part derived from investment income	Yes, but only the part derived from investment income

Life annuity

The life annuity (also known as a single-payment annuity) is a financial instrument that allows for a seller (issuer) - typically a financial institution such as a life insurance company - to make a series of payments in the future to the buyer (annuitant) in exchange for an immediate payment of a known sum with a certain net present value. The payment stream from the issuer to the annuitant has an unknown duration based principally upon the life expectancy of the annuitant. Generally, such an instrument stops payment at the death of the annuitant. However, it is possible to structure a life annuity so that the payments instead only stop upon the death of a second of two annuitants (i.e., a joint and survivor annuity); sometimes the instrument reduces the payments to the second annuitant.

The "pure" life annuity can have harsh consequences for an annuitant who dies before recovering their investment in the annuity. The risks of such a situation, called a "forfeiture", can be ameliorated by the addition of an added clause under which the annuity issuer is required to make annuity payments for at least a certain number of years (the "period certain"); if the annuitant outlives the specified period certain, annuity payments then continue until the annnuitant's death, and if the annnuitant dies before the expiration of the period certain, the annuitant's estate or beneficiary is entitled to collect the remaining payments certain. The tradeoff between the pure life annuity and the life-with-period-certain annuity is in exchange for the reduced risk of loss, the annuity payments for the latter will be smaller.

Factors

Many potential annuitants are already familiar with the concepts involved through knowledge of their own pension, whether from a business or government job, yet there can be a notion that annuities have limited value for the buyer or that the buyer cannot expect a fair payout from the investment. Some argue that this instrument has no advantage for the buyer. The other side of this notion is that the conditions for the instrument are stacked in favor of the issuer, though issuers have grappled with this instrument for years and do face risk.

From the annuitant's viewpoint, factors related to the instrument can be fairly complicated. Some studies have stressed that rational decisions may be difficult for the buyer in this case. 

As well, there are the ethical issues that can be of concern dealing with fair play. For example, witness reports of malfeasance on the part of some playing the role of issuer, such as selling unsuitable annuities. In the U.S., the individual states provide some assistance to the buyer and some regulation of the issuers.

From the issuer's viewpoint, there are many technical factors that determine the amount of an annuity payment for the life expectancy of the annuitant and that influence yields on the investments annuity issuers invest premiums in. There are expenses (including distribution costs) related to managing the instrument and profit expectations that affect the decisions about the payment. Risk management costs for the issuer can become more problematic, if annuitant's returns are given more weight than has been the case.

Other factors are concerns, such as inflation and usury, which might be considered auxiliary by the issuers but not by the annuitants.

Some countries developed more options of value for this type of instrument than others. However, a recent study reported that some of the risks related to longevity are poorly managed "practically everywhere." 

Longevity insurance is now becoming more common in the UK and the U.S. while Chile, in comparison to the U.S., has had a very large life annuity market for 20 years.

Future

It is expected that the aging of the boomer generation in the US will increase the demand for this type of instrument and how it might be optimized for the annuitant; this growing market will drive improvements necessitating more research and development of instruments plus increase insight into the mechanics (including dynamics in more than the sense of the dynamical system) involved on the part of the buying public. An example of increased scrutiny and discussion is that related to privatization of part of the U.S. Social Security Trust Fund.

Recently, New York Life introduced a variable annuity that allows both tax-deferred growth and longevity protection.

Earlier, MetLife had introduced 'longevity insurance' via a fixed deferred income annuity.

Life Annuity Benefits

Fixed annuities can be of the ‘life annuities’ type or ‘fixed term’ type. Life annuities promise regular payment to the owner of the annuity till the death of the owner. The benefits of life annuities are many, and there are several kinds of life annuities, each available for different situations and levels of financial protection to the owner. The various life annuity plans comprise of different insurance components for the owner, and hence, the benefits derived from the various annuities are varied. Let’s look at the different life annuity plans available in general and their advantages.

Straight life annuities - are the simplest form of life annuities and insure a steady, specified income to the annuity owner until death. It doesn’t guarantee any insured income or transfer of benefits to the beneficiaries after the death of the annuitant. Because of it’s limited insurance component, straight life annuities cost comparatively lesser.

Substandard health annuities – are straight life annuities specially designed for annuity purchasers with serious health problems. Compared to normal straight life annuities, the payments received from these annuities are lower. The benefits for this type of annuity are mainly derived from a more frequent pay-in at times of need. This is especially helpful for people going through phases of treatment and medication. The cost of these health annuities depends on the probability of the annuity owner’s survival and on the life expectancy of the annuitant. A lower life expectancy will increase the cost of the annuity.

Life annuities with guaranteed terms - offer more financial protection in comparison to a normal straight life annuity because they allow the annuitant to assign a beneficiary to whom the remaining value of the annuity will accrue to, if the annuitant expires. However, in such cases, the lump sum payment to the beneficiary may result in a significant payout to tax. With a joint life annuity contract, the chances of losing considerable amounts to taxation in case of the death of the annuitant is avoided, and at the same time, such annuities ensure a specified payment at regular intervals to the spouse, after the annuitant's death. Naturally, both these types of annuities have an attached additional cost for this insurance.

Life annuities are more expensive than all other forms of annuities, yet the most popular. The cost of an annuity as well as the monthly payment promised by it depends on the insurance coverage packed in the plan. An annuity spread over a longer time, the protection against illness or untimely death of the owner, and the life expectancy of the annuitant – all decides the cost and the amount of the payment to be received at the regular intervals. The price of a life annuity includes the money invested in the annuity as well as the premium being paid for the insurance components.

Annuity death benefits

The aspect of security and financial shelter that comes with annuities is something which very hard to ignore, especially if you had been a serviceman in your working years. Particularly for people who have reached their retirement phase, the concern of having some source of income becomes crucial. Over the years, annuities have proven to be a reliable and dependable alternate source of steady income especially for such concerns. Let us put forth some basic ideas about annuities and particularly annuities death benefits here.

A lot of companies offer special features in their annuities that may be immensely useful to the senior citizens. Most annuities offer death benefit provision in certain levels. Annuity death benefits mean that you get invest your money with an insurance company and leave it there till retirement. After retirement, you get back your money in parts till your death. A major portion of your money is got back after your death and enjoyed by your spouse or your nominee. There are also options of your nominee getting it again steadily over time or taking in lump sum. Most of these repayments come with an interest over your principal amount. These arrangements are aimed to stabilize your sources of income or others dependent on you. One can also choose to take back all the money before death. As a thumb rule, the longer you money stays with the insurance company, the more you get benefits in all forms.
Different annuities may have different death benefit assurance. One has to check in details and you need to check in detail what is being offered. A fixed annuity for life, generally does not promise a death benefit, which means that you may lose the remaining part of your money to the insurance company, if you die early. On the other hand, if you buy a life annuity with guaranteed terms, it allows you to assign a beneficiary to whom it will be transferred if you die before the annuity period. Each program has their advantages and disadvantages. It is a matter of making a conscious and judicious judgment that suits your savings and needs. It is advisable that you spend adequate time before you invest.

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