Annuity

economic-dictionary

An annuity is an income that a person receives until the moment of his death. Usually periodically and generally monthly. This is done after the initial or periodic prior payment or deposit of a certain amount of money.

A life annuity is considered as an investment and savings tool, especially directed towards families and the stimulus of maintaining the standard of living or well-being in the long term. It works as an insurance that is activated when the individual ages and stops working.

Typically, this type of financial investment product is offered by an insurance company or a credit institution and associated with a certain level or interest rate agreed upon by both parties at the signing. In the life annuity, the longevity risk is covered by the entity providing the service, for example, an insurance company. Such an institution will incur higher costs if the pensioner lives for many years.

On the other hand, stopping a plan of this type and withdrawing the deposited capital prematurely usually entail the payment of compensation or the recovery of a lower amount than invested. So the entities that offer the product anticipate withdrawals of funds than expected.

This concept is often identified with that of mutual funds or private retirement plans.

On the contrary, non-life annuities have a validity period that can end before the death of the insured.

How the annuity works

During a specified period of time, a person agrees to deliver or pay a periodic premium or fee to the entity or company with which the product is contracted. In this way, it accumulates for years an amount of money deposited and under a fixed or variable interest rate (which is the most frequent modality).

When the time comes, this amount will be collected through monthly income as a salary until the death of the holder, in a very similar way to retirement pensions.

The capital given up by opting for annuity insurance can also be deposited in one (known as a single premium) or several large payments, such as a bank deposit.

Advantages of an annuity

  • Help families. Especially in periods of economic crisis, people have the possibility of maintaining an income level if they have previously decided to own a similar product.
  • Eliminate the risk of longevity. Unlike annuities with a specific maturity, annuities allow you to receive that income throughout your life, regardless of whether you live many more years than expected.
  • Commonly, these types of annuity plans are single-person, although there is the possibility that they are for two people, frequently in the case of life insurance for couples or marriages who decide to share them.
  • They are usually easily modifiable or adaptable in terms of the initial fee and the income to be received periodically.
  • This type of income supposes important fiscal advantages for its holder.

Disadvantages of an annuity

  • This type of product is usually linked to higher initial costs, to a large extent when dealing with long-term plans. Therefore, its bidders seek to obtain higher profits at the initial moment.
  • As a savings tool, life annuities mean that families dedicate fewer resources to consumption and, therefore, there is less movement of money in the economy.
  • Generally, the costs associated with withdrawing the funds before the agreed date are high, discouraging holders to interrupt these plans.
  • In periods of economic instability, there is often mistrust towards the entities responsible for managing this type of financial products, while at the same time they are blamed for a certain lack of transparency in situations of economic problems.

Life annuity as a complement

The annuity can be acquired in a private institution to supplement a pension already received by the State.

On the other hand, in some countries there are Pension Fund Administrators (AFP), private entities where workers can save for their old age. These institutions allow individuals to transfer their funds to an insurance company upon retirement. If they so decide, they have the option of accessing periodic remuneration for life

If the worker does not contract with an insurer, the AFP maintains custody of the capital saved and is responsible for paying a non-life annuity to the retiree. In this case, it should be noted that the contribution account is individual, that is, each person has a fund that can be depleted.

Additional clauses for annuities

There are additional clauses compatible with a life annuity contract. For example, it is possible to assign a beneficiary in the event of death.

Also, a guaranteed period can be purchased for an additional amount. So, if the pensioner dies, for example, during the first ten years of the policy, the beneficiary will receive the same monthly amount as the contract holder.

At the end of the guaranteed period, the beneficiary begins to receive the percentages as a monthly payment according to the law, if applicable. In the case of the spouse, for example, it is usually around 50% of the employer's pension.

Annuity

Tags:  latin america administration Business 

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