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Annuity Lesson
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Annuities are financial products that guarantee the holder a fixed return so long as the holder remains alive, thereby providing insurance against lifetime uncertainty. The terms of these contracts depend on the information available to insurance firms. Unlike age and gender, information about individual survival probabilities cannot be readily ascertained. This asymmetric information causes market inefficiencies, such as adverse selection.
Groundbreaking in its scope, The Economic Theory of Annuities offers readers a theoretical analysis of the functioning of private annuity markets. Starting with a general analysis of survival functions, stochastic dominance, and characterization of changes in longevity, Eytan Sheshinski derives the demand for annuities using a model of individuals who jointly choose their lifetime consumption and retirement age.
The relation between life insurance and annuities that have a bequest option is examined and "annuity options" are proposed as a response to the lack of secondary markets. This book also investigates the macroeconomic policy implications of annuities and changes in longevity on aggregate savings. Sheshinski utilizes statistical population theory to shed light on the debate of whether the surge in savings and growth in Asia and other countries can be attributed to higher longevity of the population and whether this surge is durable.
This book shows how understanding annuities becomes essential as governments that grapple with insolvency of public social security systems place greater emphasis on individual savings accounts.
What is an annuity?
It’s an agreement for one entity to pay another a stream or series of payments. Usually insurance companies write them but a charity or a trust can.
Categories:
Fixed or Variable
Deferred or Immediate
Fixed Period, Fixed Amount, or Lifetime Qualified or Nonqualified Tax status
Single Premium payment arrangement or flexible premium payment
Features:
Tax Consequences
Most investments incur capital gains tax each tax year. However, earnings, capital gains and income from annuities aren’t taxable until you withdraw money. 401Ks and IRAs offer the same tax deferral but there is a limit on the amount you can contribute on an annual basis. With an annuity there is no limit on the amount you can contribute. It’s a lot easier to withdraw funds from them than from 401ks and IRAs.
Asset Protection
If you are receiving payments from an insurance company the best a creditor can do is collect the payments as you receive them because technically the payments that you made to the insurance company belongs to the insurance company not you. The creditor can’t take the money you paid.
Some state laws and court cases also protect some or all of the payments. Your money in tax-favored retirement plans, such as IRAs and 401ks are generally protected.
Of course one of the best ways to protect your assets from creditors is to pay your bills on time. However, anybody can run into tough times when they have problems paying their bills. You have to be careful because when this happens to you there are many companies out there that promise to help you fix your credit but in reality they are just after your money.
You can improve your own credit score by monitoring the three main credit bureaus. When you find a mistake you can file a dispute claim with the credit bureau to get it cleared up usually within 30 days. You can also get protection against identity theft. By monitoring your credit on a regular basis you will know if someone tries to open an account in your name.
Investment Options
You can invest in a fixed rate plan which would earn a fixed interest rate, just like a bank Certificate of Deposit (CD). A variable rate plan would invest in stocks, bonds or other mutual funds. Some may offer a feature that guarantees your investment will never fall below its value on its most recent policy anniversary. This would be referred to as a floor.
Income Options
Because these instruments are similar to life insurance policies you can receive payments for the rest of your life. They accomplish this by taking money from your investment, your investment earnings and from the money from other’s who didn’t live as long as you. Like insurance companies they use actuarial tables to forecast your average life span to determine how much to pay out. When they guess right they win and when they guess wrong the annuitant wins. Over the long run they always come out ahead. Don’t get an annuity confused with a whole life insurance policy because there is a big difference. With a whole life insurance policy the interest you earn is very low so you primarily pay enough during your life so when you die your beneficiary receives the face value of the policy. However, this is not a very good investment.
Benefits to Your Estate
You can purchase a guarantee period with your annuity so in the unlikely event you die immediately after your payments start your heirs can still get your money for a specified period usually 10 to 20 years. Another benefit is annuity payments that pass on to beneficiaries are not subject to probate or a part of your will.
For Additional Annuity Information Visit Annuities-Financial-Planning.Com
You will get free information about annuities from a different perspective.
