When it comes to insurance and insurance products, most people know about policies that provide cover against specified risks or investments such as education policies. Another insurance product are life annuities. These annuities explained where one is set up to receive payouts of a specified amount at stimulated durations. It can also be paid out as a lump sum.
It is most often taken up by retired people so that they can receive their pension in the amounts when they are no longer working.
The benefit receiver or annuitant starts to contribute periodically into the annuity fund when they are still working. It is also possible to put a lump sum into the fund.
Upon retirement, the annuitant starts to receive money from their fund. This is usually done monthly. Upon their death, the annuity ceases. However, if a beneficiary has been named, they can receive the remaining amount. If none has been named, the balance in the fund is forfeited.
Unlike pension funds which are less complex and regulated by government, it is advisable that one consultants with a professional before signing up for this product.
It is often purchased by the wealthy or well off because of the tax benefits its offers. They use it to store away large amounts of money or to reduce their taxes payable.
There are different types of life annuity that one can choose according to their circumstances.
One class is the variable and fixed annuity. With the fixed, payments are done in set amounts that go up by a fixed percentage. In contrast, variable annuities make payouts depending on the returns gained from the different investments the insurance makes with the funds, mostly equity mutual funds and bonds.
Variable annuities offer the advantage of deferral of recognition of tax on returns. Taxes are not payable until one makes a withdrawal. Also, sub accounts are set up within the fund so that an investor can work within them and avoid various charges and fees.
There are also guaranteed annuities. Should a fund holder pass away before receiving their annuity funds, the remaining funds are forfeited in what is called a pure life fixed annuity. These annuities explained by the addition of a clause where the issuer who is the insurance company makes payments for a set number of years.
If the annuitant is still alive at the end of this period, payments are done until their death. If they die before the end of the set period, a beneficiary can collect the remaining amount. This is in essence an exchange for reduced risk of loss of funds for the annuitant for smaller payments.
There are also joint annuities in form of joint life and joint survivor life annuities . With this type, payouts stop when one or both annuitants die. This package is usually taken by couples and can be taken so that payouts continue to be made to the survivor when a spouse passes away and stop when the other also passes away.
The other kind is impaired life annuities which are taken to improve terms offered following a medical diagnose that significantly reduces life expectancy. It is becoming increasingly popular. Medical underwriting is done and there are qualifying conditions have to be satisfied.