The Annuity Business of an Insurance Company
A Insurance Article Contributed by Shobha Cutting
The Annuity Business of an Insurance Company
An insurance company generally also continues in the business of providing annuities. An annuity is a series of fixed payments, which might be over a fixed number of years, over the lifetime of an individual, or both. The most common use of annuities is to provide a pension for people in retirement. The policyholder or his employer either make a lump-sum payment to the insurance company or pay periodically, in return for an assured periodical income at a later stage.
In a typical annuity contract, an individual or someone else on his/her behalf, would either pay a lump sum or a series of payments (called premiums) to an insurance company, and in return receive a fixed income payable for the rest of his life. The exact terms of an annuity product are drawn up in legal terms in a contract.
Payment Options of an Insurance Company
Once annuity is opted, a vide variety of payment options become available. If the insurance company makes payments over the life of the annuitant, it is called 'lifetime annuity' or 'life annuity'. If the payment is to be made by the insurance company over a fixed period, the annuity is called 'annuity with period certain'. Payment could also opted to be made over a fixed period or over the lifetime of the annuitant, whichever is longer. Such annuities are termed 'life with period certain'.
There is yet another payment option with the insurance company in respect of annuities. It is the 'temporary life annuity'. Here payment is made to the annuitant till his death or after certain number of payments. This option differs from the period certain annuity since the period certain annuity will keep paying the next of kin of the annuitant till the expiry of the fixed period even in the event of death of the annuitant.
Types of Annuities Offered by an Insurance Company
· Lifetime annuity: This is the most common type of annuity purchased from an insurance company, used to provide people with pension in their old age. This annuity works somewhat like a loan from the annuitant who made a lump-sum payment and the insurance company returns it in installments. To make sure that the annuitant does not run out of installments during his/her lifetime, the investment relies on cross-subsidization.
The population of lifetime annuitants is expected to have a distribution of their lifespan around the mean for the whole population. Those that die earlier subsidize the payments to those who die later.
· Deferred annuity: A deferred annuity has two phases. The accumulation phase is the time between initial purchase and that annuity becoming valid for payments. Before this time, additional purchase payments, known as premiums are to be made and there is enhancement in the value. In a deferred annuity, the funds collected are either placed in avenues where returns are guaranteed, or in variable accounts to earn interest. The increase in funds is not taxable.
