It can be said that the biggest blessing of annuities is it offers you with regular income for you and your spouse for the remaining part of your life or at least pays you for a pre-determined number of years that you select. In the light of this, it is worthwhile to consider what annuity payments can be expected based on different annuity types.
To make things clearer, let us suppose a person has a sum of $80,000 to invest in an annuity. He is already 65 years of age with a remaining life expectancy of 17 years.
If that person wants a life annuity on himself, an annuity company will decide on a monthly annuity payment taking into account factors like sex, age, amount of investment, and the prevailing annuity rates. The annuity company assumption is the person will die 16 years hence and so they calculate the number of monthly payments that will be due. But the obligation is there to keep making annuity payments if the person lives longer. The annuity company will also keep any unpaid funds if the annuitant dies sooner as the annuity payments will cease (in the case of lifetime payments).
Let us consider the various factors that determine the annuity payments:
Age of the person - Assuming the annuity payments are $472 per month and the person is 65 years old, his remaining life expectancy may be 17 years. But, if we take the case of someone older, say 75, the insurance company would pay out $627 per month since they will be statistically paying for fewer months as the life expectancy is 11 years.
The person's gender - Statistics have repeatedly shown that women outlive men and a 65 year old woman will have a remaining life expectancy of 20 years. This means more monthly annuity payments for the insurance company. So instead of $472 monthly annuity payments as the male gets, a female gets annuity payments of only $435.
Joint Benefit - It is suggested that a married couple may choose a survivorship contract whereby annuity payments will be made until the surviving spouse passes away. Assuming that both the spouses are of the same age (65 years), the annuity company would pay $391, since statistically, as stated earlier the female spouse will live longer and the insurance company now takes on the risk of 2 people living beyond life expectancy and thus, the annuity payments are less.
Survivor benefit - since many people are concerned that they give their money to the annuity company, begin receiving lifetime payments and then drop dead after 2 years, the insurance industry offers an option to mitigate that risk. It's called life with term certain. A life with term certain of 10 years will make annuity payments for life to the annuitant, but if he dies within 10 years, payments will continue to a beneficiary for 10 years.
Immediate annuities may be defined as the remittance of a single premium to an annuity company to enjoy regular periodic annuity payments throughout a pre-determined number of years. But, once annuity payments commence, the annuity cannot be surrendered for value. For tax purposes, the income is partly treated by the authorities as ordinary income and the remaining as return of capital. It will also attract 10% penalty if the recipient is below 59 ½ years. Any guarantees are obviously based on the claims-paying capability of the concerned insurance company. It is proper to consider annuities as long-term investments.
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