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Tuesday, November 19, 2019

Columnists > Making Sense Out of Dollars

“A” is for Annuities

Oct 2, 2017

By Joel Lerner - columnist

Part 1 of 8
An annuity is a contractually executed, relatively low-risk investment product, where the insured (usually, an individual) pays a life insurance company a lump-sum premium at the start of the contract. That money is to be paid back to the insured in fixed, incremental amounts, over some future period (predetermined by the insured). The insurer invests the premium; the resulting profit/return on investment funds the payments received by the insured and compensate the insurer. Conventional annuity contracts provide a predictable, guaranteed stream of future income (e:g., for retirement) until the deaths of the beneficiaries(s) named in the contract, or, until a future termination date — whichever occurs first.
When you retire, you will want to be able to live comfortably for life on the income from your investments.
However, because of modern medicine, many people run the risk of outliving their investment income. With this increasing longevity, a person's retirement can span 20 to 30 years.
To avoid this problem, the purchasing of an annuity could be a possible solution. An annuity may be considered the opposite of a traditional life insurance policy. When you buy insurance, you agree to pay annual premiums to an insurance company. In return, the company will pay, according to your instructions, the face value of the policy in a lump sum to your beneficiaries when you die. By contrast, when you buy an annuity, you pay the company a sum of money and, in return, receive a monthly income for as long as you live. Naturally, the longer you survive, the more money you'll receive. Therefore, you can never outlive your return regardless of how old you become. It thus can be stated that life insurance protects against financial loss as a result of dying too soon, while an annuity protects you against financial loss as a result of living too long. Annuity insurance may be issued only by life insurance companies, although private annuity contracts may be arranged between donors to non-profits to reduce taxes. Insurance companies are regulated by the states, so contracts or options that may be available in some states may not be available in others.
Although annuities have existed in their present form only for a few decades, the idea of paying out a stream of income to an individual or family dates back to the Roman Empire. The Latin word annua meant annual stipends, and during the reign of the emperors the word signified a contract that made annual payments.
Individuals would make a single large into the annua and then receive an annual payment each year until death, or for a specified period of time. During the Middle Ages, annuities were used by feudal lords and kings to help cover the heavy costs of their constant wars and conflicts, with each other.
Look at the keyboard and you will see that “U” and "I" are always together.

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