Annuities: promising income, leaving a legacy

Another form of insurance provided by many life insurance companies is the income annuity. An annuity is a form of insurance, functioning as a conservative investment in the insurance company, that guarantees a stream of money — sometimes fixed, sometimes variable — each year, typically for the rest of a person’s life. Annuities often offer a retirement solution for people who are concerned they might outlive their pensions, 401(k)/403(b)/457 plans, IRAs, investments, savings or other retirement funds.

An annuitant pays a single premium up-front to the insurance company in exchange for immediate and regular payments, plus as much as 10-percent payout, as well as dividends, which are not guaranteed. Payments usually can be deferred from two years to 40 years from when the annuity is purchased.

The annuitant can designate beneficiaries as part of legacy planning, making sure his investment lives on even after he’s gone.

There are several types of annuities that offer guaranteed, fixed-sum payouts. These annuities may be single or joint, for instance, for a husband and wife. A life-only annuity generally provides maximum lifetime income for one person, or two people in a joint annuity. Payments stop at the annuitant’s death. For joint life-only annuities, the payments continue to the survivor for the rest of her life. Payments stop at the death of both annuitants.

A life with period certain annuity pays income for one lifetime, or a guaranteed period of time, usually 10 to 30 years, whichever is longer. If the annuitant were to live beyond that period, payments would continue for the lifetime of the annuitant. If the annuitant dies prior to the end of the guaranteed period, payments would continue to the beneficiaries for the remainder of the guaranteed period.

A life with cash refund annuity pays income for one lifetime. This option guarantees that if the annuitant dies, the beneficiaries will receive a lump sum equaling the premium amount, less all payments made to the annuitant.

A life with installment refund annuity pays for one lifetime, and the lifetime of one other person, if it’s a joint policy. This option guarantees that if the annuitants die, the beneficiaries will continue to receive the annuity payments until the premium is fully recovered. This provision entitles the beneficiaries to receive the total of the premium, less all payments made on a scheduled installment basis.

Insurance companies have to make assumptions about mortality — that is, how long people are likely to live — to determine how much income annuity premiums can buy. As it pertains to life insurance, this process of measuring risks and uncertainties, and setting corresponding prices is called actuation. Through mortality experience, actuaries at life insurance companies spend time estimating when people will die — not individuals, but groups of people. Of course, mortality is not a question of if, but a question of when. All people have a 100-percent probability of dying.

A wealthy individual might make an arrangement with an insurance company in which he’d receive $3,000 every month for the rest of his life. When he dies, the same annuity payments would be made to his son. Were it legally possible, he also might arrange to have the same payments made to his grandson. Thus a line of continuity on the basis of genealogy would be established.

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