Annuity Guide

A Story

In the year 1965, a woman named Jeanne Calment was living in Arles city in France. She was 90 years old. 

Madame Calment outlived her only daughter and grandson and had no living heir. She decided to sell her apartment. She signed an agreement with her lawyer Andre-Francois Raffray. 

This agreement said that while Madame Calment could live in her apartment for the rest of her life, her lawyer agreed to pay a monthly amount of 2,500 Francs until she died. Raffray would get the apartment the moment Calment died.

Do you know what happened after that?

Raffrey died in 1995 at the age of 77. At that time, Madame Calment was 120 and still alive. Raffrey’s family honored the commitment to pay the rent to Madame Calment till she died. She died two years later at the age of 122. Raffray and his family ended up paying Madam Calment a total of 918000 Francs, more than double the value of the apartment at that time.

Madame Calment was an exception. She might not be in the future.

What we learn

Life is short. But what if it is not as short as you thought it to be?

What if you live too long? How will you manage your expenses once you retire and do not have any earnings?

See, as medical science is progressing and we are discovering new ways of treating diseases, people are living longer now than they used to live in the past.  

There are now more than half a million people aged 100 or older around the world.

And we all know that as we live longer, our living costs increase because we have to spend more on our medical needs. 

And with rising inflation and passing of time, the wealth you accumulated might not be just enough.

Well, this can be the solution. Buy an annuity from an insurance company and enjoy the regular income which it provides for the rest of your life. Live a financially independent life without any worries of outliving your wealth.

What is an Annuity?

Now you know that living too long is also a risk, a financial risk. 

An annuity is a financial instrument which is designed to provide you financial security in the form of lifelong regular income throughout your life. 

 When you retire from your professional life, your monthly income stops. What you are left with is a huge amount of money which you accumulated for your retirement. We hope that you have already saved and invested well while you were earning to build a decent retirement wealth for yourself.

Now what do you want this money to do for you? Maybe provide you a regular monthly income to live a comfortable life till you and your spouse live.

 The last thing you would want is running out of money before you pass on. 

 Here’s where an annuity plan can come to your rescue. You can buy an annuity plan which secures a guaranteed lifelong income for you and your spouse.

How does an Annuity Plan work?

Remember our Madame Calment. She sold her house to Raffrey which was a huge asset only to receive a small amount of money every month.

An annuity plan works in the same way by converting a huge sum of money into a stream of guaranteed regular income for life. 

Annuities have two phases. 

Like any other insurance product, you have to first pay premiums to the insurance company to buy annuity. 

Like Madame Calment sold her house to Raffrey, you can pay a huge premium in one shot. Or you can choose to pay regular premiums over a period of a few years. This is the first phase.

If you choose to pay regular premiums for a few years, these premiums accumulate and grow into a big fund. This phase is called the Accumulation Phase. 

The fund which is accumulated over this phase is used to provide you

 Once the accumulation phase is over, the fund which is accumulated by your insurance company is utilised to provide you regular guaranteed income. This income is usually fixed and guaranteed for life. This period is called the Annuitization Phase. 

What is Covered?

 Your income from annuity is guaranteed for life. No matter how long you live, you will continue to receive payment which is promised to you. So you are protected as you cannot outlive your wealth.

As you buy an annuity, you transfer your risk of living too long to your insurance company.

Also, once you pay a huge amount of money to the  insurance company in the form of premiums, your insurance company has to manage and invest that money. Whether that fund earns well or poorly, you don’t have to worry. Your insurance company will continue to pay you as promised. 

As an annuity buyer, you are protected from investment risk.

When should you buy an Annuity?

If you are close to retirement or already retired, buying an immediate annuity can be a good option for you. Your regular income starts immediately and you can enjoy your retired life without any worries.

If you have 10 or more years left until your retirement, a deferred annuity is a good option where you buy the annuity and wait for a few years. While you wait, your fund grows into a bigger amount and your regular income starts only after you retire.

Fixed and Variable Annuities

Annuities come in various options. 

Fixed annuity provides you fixed income every month which is guaranteed by the insurance company. You receive the same amount from your insurance company every month, no matter what.

Variable annuity allows the insurance company to alter your payouts every year depending on how the fund performs. If the fund performs well, you get higher payouts in that year. If the fund does poorly, your payouts get smaller.

Things to consider before you buy

Please remember, when you buy an annuity, you lose flexibility and buy guarantee. On top of that, the amount of money which you pay to buy an annuity is huge.

Once you buy an annuity, you cannot withdraw your money. Even if you are allowed to withdraw, there are huge withdrawal penalties.

So do not invest that money in an annuity which you think you are going to need in the immediate future.  Invest only that portion of your money which you have kept aside for your long-term needs.

Annuities come in many options. Check out all annuity options and buy one which suits your needs.