An annuity contract is the opposite of a life insurance contract. Life insurance companies issues both: annuities combat the uncertainty of living too long and life insurance dying too soon.
Simply put an annuity is a contract in which an insurance company makes a series of income payments at regular time-periods (monthly, quarterly, or annually) in return for a premium (one-time deposit) or premiums (sequence of payments) you have paid. Only an annuity issued by a life insurance company can guarantee to pay you an income for as long as you live-in other words your income will last as long as you do-you cannot outlive it.
This article will focus on the income producing aspect of an insurance company annuity.
The insurance company annuity offers a variety of guaranteed lifetime income options for you with or without different secured time-periods for the designated beneficiary. The insurance company annuity will be discussed in detail.
This article will not discuss annuities as tax-deferred products that are being used solely to accumulate money. That I will leave to those who recommend this type of a purchase-I do not.
The insurance company annuity alleviates the need for you to become an expert in managing money, which is a basic requirement when producing a stream of retirement income by way of a systematic withdrawal approach from a mutual fund. That expertise requires in-depth knowledge regarding present-value, future-value, time, payment, and interest. These five ABCs of finance are the components, which must be entered into either a hand-held calculator or the proper software in order to compute, a stream of retirement income for X dollars per month for X years.
Systematic Withdrawal Approach Considerations
The Annuitization Principle
Simply put, this is a process whereby your principal e.g., $1,000,000 is converted into a guaranteed monthly payment for as long as you live. As stated previously, as the "bedrock of an annuity" it is impossible under this system for you to outlive your income. It will last as long as you do. This is the essential reason why insurance companies believe that their annuity is the choice over any alternative approach. It avoids all of the negative aspects of the systematic withdrawal method, and could provide some of the positives. On the other hand, insurance companies being in the money management business as owners of broker-dealers offer systematic withdrawal methods through their registered representatives and/or registered investment advisers.
Consumers have overlooked this time-honored principle of "annuity income" as the financial markets have soared into new highs. This type of a continuing economic attitude depends on an ongoing market boom to keep people clear of the barriers in their path to a stream of retirement income.
Insurance Company Annuity Income Options
William D. Brownlie, CLU, ChFC, CIP, LIA is the author of Life Insurance Boot Camp Buyer's Guide. This article is based on condensed material from Chapter 19.
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