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| Photo Credit Image by Flickr.com, courtesy of Sami Keinänen |
When
you hear the word insurance, the first thing that comes to your mind is
obviously protecting something precious to you; life, your car, your house, and
all the rest. This, however, is just a branch of insurance.
There
is a branch of insurance that most people don’t know about and tend to ignore. This
branch also protects something which should be precious to you as well; your
income at retirement.
Most
young people don’t think they should bother about income at old age, they find
cars, property, business, etc more precious until retirement comes breathing
down their necks.
However, this insurance product protects you against a special type of risk which is the risk of living beyond your pension savings. This product is called “annuity” (or life annuity as related to insurance).
An
annuity simply means a level sequential cash flow (i.e. the same amount being
paid regularly) in the sense that you give a Life insurance company a lump sum,
the company invests the sum and makes quarterly or annual payments to you
depending on the terms of the contract.
Key
advantages of this option include the fact that Investment risk is passed to
the Insurance Company therefore protecting you against the risk of making bad
investment decisions with your pensions. In the event of death during the
guaranteed period, payment is made to a named beneficiary, and the Longevity risk is passed
to the insurance company. Hence, there is no question of outliving ones pension
benefits.
What is a Life annuity?
A life annuity is an insurance
product where by a life insurance company makes a series of future payments to
the buyer (also called an annuitant) in exchange for the immediate payment of a
lump sum or a series of regular payments by the annuitant. This product is very
popular amongst retirees and pension savers because they are mostly used to
help retirees budget their money after retirement. When the annuitant retires,
the annuity makes periodic (usually monthly) payouts to the annuitant,
providing a reliable source of income.
Why should you invest in Life
annuities?
At
retirement, it is more beneficial for a retiree to invest his / her retirement
income in an annuity for life purchased from a reputable life insurance company
because this form of annuities are characterised by an income potential to last
a life time. Annuities prove to be apt for your retirement plan as they cover
you against the risk of outliving your income at retirement.
References
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