Life Insurance Annuity – Exploring Your Options

Life Insurance Annuity

People who are worried about outliving their income can benefit from life insurance annuity.

When you decide to invest in annuities, you will receive income at a future date.

This is of course subject to the conditions and terms of the insurer. Put simply, an annuity is a form of long term investment. This product is offered by insurance companies and is specifically designed to protect policy holders from outliving their income.

In essence, annuitization helps you purchase payments as per your contribution. The payouts are made periodically and can last a lifetime. They are very flexible investment plans that allow you to invest a lump sum, or you could choose to invest over a specific period of time. You may opt to start receiving payments as soon as you make the lump sum payment or at a later date. You also have the freedom to select a variable, indexed or fixed rate of return on your investment.

Types of annuities

There are different types of annuities and you can choose one that suits your needs. It is advisable to have a careful look at the features and base your decision on what works best for you.

Fixed

The main characteristics of fixed annuities are that earnings and the principal investment are guaranteed. The insured is expected to make fixed payments during the life of the contract or the stipulated period.

Variable

In this type of annuity, you get to choose the investment. Your earnings will be subject to how these investments perform. The best strategy is to have investments with different risk levels. They should also have potential for growth.

Fixed indexed

This is a special class of annuities. Yields are determined by an equity based index, such as the S&P 500.

Immediate

This is a lump sum purchase and the holder is guaranteed immediate income.

Analyzing cost of annuities

It can be somewhat challenging to unpack the costs of these investments. This is mainly because the income received by the life insurance policy holder is based on a given formula. The insurance company takes into account certain factors such as investments risk, investment cost, marketing costs, administration expenses and profit. The insurance provider can guarantee a particular income after different costs have been deducted. Read: How to choose dive insurance

Calculating returns on annuities

You may find a product in which the annuity income quoted at the beginning of the annuity will remain the same throughout the life of the contract. The provider will embark on investing in a series of investments to generate returns to pay the stipulated amount. If the market performs well and the insurer makes more than the agreed earning rate, he keeps the excess profits. If on the other hand they make less than the agreed amount, the insurer still has to honor the agreement and pay the agreed amount.