The primary function of an annuity is to liquidate a principal sum regardless of how it was created – annuities, like life insurance and to protect against loss of income. However, life insurance provides income arising out of premature death while an annuity protects against loss of income arising out of excessive longevity.
According to McGill’s Life Insurance, the annuity concept is founded on the unpredictability of human life, assuming that the sum is to be liquidated over his or her remaining years. Because he really cannot predict his life expectancy, he needs to plan over a longer period to spread the accumulated principal.
Classification of annuities covers the number of lives covered, time when payments commence, method of premium payment and nature of the insurer’s obligation. An annuity can cover a single life or multiple ones.
When it covers more than one person, it is called a joint or survivor annuity which means that it will continue as long as either of two or more specified persons live.
Annuities can be considered immediate or deferred. An immediate means that the first payment is due one month after the date of purchase. Deferred may be purchased with either single or periodic payments.
Pure and also called a straight life annuity provides monthly income payments that continue as long as the annuitant lives but terminates at that person’s death.
The payments may be made monthly, quarterly, semiannually or annually. The more frequent the periodic payment, the larger cost the annuity is in terms of annual income.
A refund annuity is any type that promises to return a portion or all of the purchase price of the annuity and is more popular than pure annuities. Generally, there are two options; a promise to provide a certain number of annuity payments whether the annuitant lives or dies or a promise to refund all or a portion of the purchase price in the even to the annuitant’s early death.
Want to learn more about life insurance? Read our article The Most Frequently Asked Life Insurance Questions.