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What is Annuity & its fundamentals?
Annuity, a contract meant for long term duration, is issued & sold by a life insurance company. The insurance company makes the payment in a fixed stream to retirees upon annuitization, which is generally an income to the latter. The annuities are designed to underpin the growth of retirement income and are funded by individuals.
In case of a deferred annuity, where payments begin after a certain duration, there is an accumulation phase which is the time period when an annuity is being accumulated before the fund payouts to the individuals begin. When the payments start, the contract is said to have entered an annuitization phase.
In case of an immediate annuity, payments begin immediately in the annuitization phase, and there is no accumulation phase.
The life insurance company after accumulating funds from individuals generally invests in mutual funds to get profit from their investments.
What is the Purpose of Buying Annuities?
As a part of retirement income planning, the annuities are relied upon to get a regular income through a steady cash flow in the retirement phase.
The investors can take the payments either as a lump-sum amount or get paid periodically. The payment to the annuitant is done either for a fixed period or for the annuitant's remaining lifetime.
On the other hand, making the corpus of fund for retirement is not easy, as one has to find out how much an individual needs to save to retire. This is where the real financial planning begins. There are a number of retirement savings options available to an individual, tailored to specific needs. For example, investment can be made through the employer in the form of an annuity or super funds or pension plan.
Meanwhile, some market players in favor of income strategy also consider exposure to dividend stocks for beefing retirement investment portfolio.
What is the difference between Annuities and Pension?
While both annuities and pension are common sources of retirement income, it is important to understand the difference between the two.
Though annuities are purchased from insurance companies via the signing of the contract, the pension is generally a kind of retirement account offered by companies to their employees.
Individuals buy an annuity scheme from life insurance companies to get a guaranteed regular/lump sum income after retirement, whereas people save from the amount earned to make a pension pot throughout the life when they are earning.
While pension benefits are availed post the retirement, financial benefits of annuities do not necessarily require the person to retire.
ALSO READ: Retire from Work, Not From Life: Superannuation And Age Pension
What is the difference between Annuities and Insurance?
While both annuities and insurance plans are essential components of long-term financial planning, some differences between the two deserve closer attention. Notably, annuities can be purchased without a medical need, unlike insurance.
Looking a payment flows, annuities dole out funds to the owner when the annuitization period begins as per the contract. While, insurance schemes provide income streams to dependent in case of the owner’s death, unless the policy is surrendered.
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