Chapter 7

Annuities

Slide prepared by: Abdullah Al Yousuf KhanAssistant Professor - IUBAT7

ChapterMcGraw-Hill/IrwinCopyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.Annuities featuresAn annuity is a periodical level payment made in exchange at the purchase money (consideration of a large single amount ) for the remainder of the life time of a person or for a specified period. The insurer undertakes to pay certain level sums periodically up to death or expiry.Annuities for oneself, not for others.Annuities provides maximum use of money.Payment of annuity generally continues up to the life. Premium is determined according to longevity.Higher at younger age, lower at old age.

Difference Between Annuity And Life InsuranceAnnuity is just opposite of life insurance contract.

AnnuityLife insurance Liquidation AccumulationOnes own benefitFor the dependentsPayment ends at deathPayment made at deathPremium is calculated on the basis of longevityPremium is calculated on the basis of mortality rateProtection against living longProtection against living shortClassification of Annuities Commencement Of IncomeNumber Of Lives CoveredMode Of Payment Of PremiumDisposition Of ProceedsSpecial Combination Of AnnuitiesCommencement of Income (ordinary annuity)Immediate annuity; Commences immediately after the end of first income period.Paid yearly, half-yearly, quarterly, monthlyThe purchase money (consideration) is single amount.Generates larger income than from other form of investment.For those without dependents and with maximum possible consistent income.Annuity dueInstallment starts from the time of contract. The first payment is made as soon as the contract is finalized.Premium is paid in single amount.

Deferred AnnuityPayment starts after a deferment period or a specified age.Premium may be paid in single or installments.Premium continues until the stated date for commencement or prior death.Can be surrendered for cash. The surrender value is normally 950 percent of the premium paid. No surrender value after the deferent period.No medical examination required but proof of age is required.Useful for those who desire for regular income for themselves and for the dependents

According to Number of Lives Number of LivesSingle Life Annuity; Without dependent, wants to use all savings during the life timeMultiple Life Annuity; Joint life annuity: payment stops at the first deathLast survivor annuity: payment continues until the last person diesBased on premiums;Level premium annuitiesSingle premium annuities

According to Disposition of ProceedsLife Annuity;Regular income throughout the life-time.No payment is made after death.Not beneficial if the annuitant dies at early age.Annuity in general means this annuity. Means annual payments up to life.But the dependents will suffer at the early death of the annuitant.

Disposition of ProceedsGuaranteed Minimum Annuity;The annuity is guaranteed up to a period.In case of early death of the annuitant.Immediate annuity with guaranteed payment; Up to a fixed periodUp to a fixed period (5, 10, 15, or 20 years) and up to life thereafterDeferred annuity with guaranteed payment; Temporary Life Annuity; Annuity payments stops at the end of a specified period or at the death whichever is earlier.Retirement Annuity Policy; Disposition of ProceedsRetirement Annuity Policy;Useful for employees at the time of retirementAnnuity to individual at old ageNo sum other than the annuity shall be payableAll annuities must be payable in the country onlyBetween age 58 and 68No surrender value, commutation, or assignmentPayable only to the annuitant for the life