o Annuities A Guide To Annuities - AKI guide to Annuities.pdfdriven by private business ownership....

A Guide to Annuities

A Guide ToAnnuities


Kenya, like many other nations, is striving to develop

effectively to a level similar to that of industrialized

countries through capitalism; an economic system

driven by private business ownership. This has led

to significant changes in our social and economic

lifestyles; we have had to move away from a

traditional lifestyle to a modern one driven by the

need to increase wealth.

One area of life that has changed drastically is social

security, especially the guarantee of being free from

poverty in old age. In the traditional African society,

social security systems were assured; social norms

and practices ensured that the elderly were taken

care of by younger members of the society.

It is therefore a personal responsibility to ensure

that you have planned for your retirement life to

avoid the “Old Age Trap”.

1

The social and economic

changes we see are

increasingly leading to a

breakdown in the traditional

systems that ensured

security in old age.


WHY PLAN FOR RETIREMENT?


2



3

There are three types of retirement saving plans namely:

• GovernmentSponsoredPlans:This is through

the National Social Security Fund. Contribution

is compulsory for employers and employees.

However, the benefits paid out are often not

enough to provide for retirement.

• EmployerSponsoredPlans:These schemes

are formed by the employers for the benefit

of their employees. It is not compulsory for

employers to form pension schemes. Many

employers in Kenya have not set up retirement

schemes meaning that their employees have to

plan for retirement saving themselves.

• IndividualPensionPlans:Employed people

who are not in an employer sponsored scheme

as well as self-employed people can join an

Individual Pension Plan.


Some people think they can

keep working until death, but

is that really realistic? Health

problems is the number one

reason people retire early, and

we are all more vulnerable as

we age. When you’re young and

healthy, you might think you can

work forever, but spend more

time with older people and this

myth will be dispelled pretty

quickly. This is why it is prudent

to plan for retirement early

enough.

Youcan’tworkforever.


4

In general, a retired person needs approximately

60% of their last salary per month to maintain the

existing standard of living during retirement. The

Employees Retirement Benefits Fund can be an

important source of retirement income but it may

not be enough to finance your total retirement

needs. A survey by RBA showed that majority of

contributors spent all their savings within three

years of withdrawing their pension funds after

retirement. One way of avoiding this, is by using

annuities to provide you with a guaranteed stream

of income for as long as you live.

HOW MUCH MONEY DO I NEED FOR RETIREMENT?

60%

With life expectancy increasing each year, receiving retirement

income for as long as you live is an important consideration. An

annuity gives you the valuable benefit of a lifetime retirement

income.



5

WHATHAPPENSWHENAMEMBEROFAPENSIONSCHEMERETIRES?

This depends on the type of scheme. If it is a

pension scheme, one is allowed to take 1/3rd

of the Total Pension Fund as cash (after taxes

have been deducted). The remaining 2/3rds

of the Total Pension Fund is converted into a

monthly pension which is paid to you monthly,

quarterly, half-yearly or annually until death.

In Defined Contribution Schemes, a member

is required to purchase an annuity; after

retirement, the member receives a monthly

payment for as long as they live. In a Provident

Scheme a member is allowed to withdraw their

entire retirement fund once they attain the

retirement age.

HOWARERETIREMENTBENEFITSPAID?

The options available for payment of retirement

benefits are:

1. Paymentofpensiondirectfromthe

retirementschemefund

The trustees of a pension scheme may:

• Pay out a monthly pension deducted

from the pension fund

• Debit the fund with full purchase price

and invest the same with a bank and

pay benefits from the account.

Under this arrangement the trustees are

in charge of the investments, investment

policy and management of assets relating

to the retired employee and also carry

the risk in case the fund set aside gets

depleted while the retiree is still alive.

2. Purchaceanannuitypolicyfroman

insurancecompany

The retiree can purchace an annuity plan

from an insurance company.

This enables you to have a guarateed

income for as long as you live

WHATISANANNUITYANDWHYDO I NEED ONE?

An annuity is a contract in which an insurance

company agrees to pay you a stream of income

for life, in exchange for a lump sum payment

(also called a premium contribution). The

insurance company converts the lump sum that

you have into a lifetime income, removing the

uncertainty and problems that you may face

should your financial resources run out while

you still live. You can also buy an annuity plan

that guarantees income for your loved ones

after you die.

You can buy annuities from any life insurance

company which offers annuity products. To buy

an annuity plan, you pay a lump sum premium

to an insurance company just before you retire.

Alternatively, you can make periodic premium

payments until your selected retirement age.

Once you retire, the insurance company will pay

you a monthly income for the rest of your life.



6



7

Deferredannuity

For people who would like a guaranteed income,

but do not need to start receiving it right away,

there is another type of annuity known as

a deferred income annuity that can provide

guaranteed income at a future date.

The income payments begin more than 12 months

after you buy the annuity. You may buy this type

of annuity at any time during your working years.

The premium can be paid as a lump sum, which

will be left to accumulate with the insurance

company, or you can make a series of periodic

payments until your retirement.

WHATARETHETYPESOFANNUITIES?


The common types of annuity plans are:

Immediateannuity

In this annuity, the income payments

begin within 12 months after you buy

the annuity. This is a suitable annuity

for those who are about to retire or

have already retired. The premium

is paid as a lump sum at the time of

purchase.

Immediate annuities help to maximize

and protect income for the rest of your

life. In return for your contribution,

the insurance company provides you a

guaranteed pension-like income for the

rest of your life or for a specified period

of time, whichever is longer.

WHATARETHETYPESOFANNUITIES?


8

Example:

At the age of say 30, you can purchase a deferred

annuity that will begin paying at age 55. You can

choose to either pay a lump sum premium at 30

or make yearly premium payments until you are

54. The lump sum premium paid at age 30 will be

smaller compared with what you would have to

pay if you purchased an immediate annuity at age

54. This is because the premium paid at age 30

will be invested by the insurance company over a

longer period of time.

Deferred annuities can be an effective way to

maximize future income because the longer you

wait to start to receive income payments, the

higher that income will be.



CHOOSINGTHERIGHTANNUITY

The type of annuity you choose and its benefits

will determine the amount of income you will

receive during retirement. It is important to check

all the options offered by various insurance

companies first and then buy the annuity plan that

best suits your needs.

The amount of income payment you will receive

will depend on:

I) The amount you pay to purchase the annuity

ii) Your age when you purchase the annuity and

your gender

iii) The benefits options you choose

You can usually choose to have your income

paid every month, every three months, every six

months or once a year.

9



CHOOSINGTHERIGHTANNUITY

WHATISAGUARANTEEDPERIOD OF PAYMENT?

10

Different benefit options

1 Annuitywithoutguaranteedperiod – pays a fixed regular income for as long as you live.

2 Annuitywithaguaranteedperiod – pays a fixed regular income for the rest of your life, or for the

guaranteed period say 10 years whichever is longer.

For example: A person purchases an annuity with a guaranteed period of 10 years. If he dies after 6

years, the annuity payments will continue to be paid to his beneficiary for the remaining 4 years. If he

outlives the guaranteed period of 10 years, he will continue to receive the income payment for as long

as he lives.

3 Increasingannuity – pays an income which increases each year at a specified rate to partially

protect your income from inflation, for the rest of your life. The starting income for an increasing

annuity is normally lower, but it will provide you with better income some years later in your

retirement period.

4 Joint-lifeannuity – pays an income for the rest of your life, and then it continues to pay the income

to your spouse for the rest of his/her life, after your demise. However, income to your partner may

be for a reduced amount.

An annuity contract may

grant a guaranteed period

of payment, perhaps

five, ten or fifteen years

where a specific payment

amount is assured,

whether the annuitant

survives this period or

not. Sometimes, if the

annuitant dies during the

guaranteed period, the

balance of the guaranteed

payments is paid

immediately instead of

being paid on the periodic

due dates over the

remainder of the period of

the guarantee.



SAVINGFORANANNUITY

You may need to have a savings

arrangement that enables you to buy

an immediate annuity once you retire.

Alternatively, if you want to pay a

smaller premium, you may consider

buying a deferred annuity, where you

pay premiums earlier in your life which

are then invested by the insurance

company to accumulate the amount

you will need for your retirement

income.

11

HOWAREANNUITIESPRICED?

The factors affecting the pricing of an

annuity include:

• Mortality(Survival)

• Investmentreturn

• Expenses

Estimating the amount payable

Annuities are priced assuming that

they will pay a specified annuity

benefit e.g. Kshs 1000 per annum.

This information is then used to price

annuities of different amounts.

Example:

To purchase an annual annuity of Kshs

107.28, payable monthly in advance,

guaranteed for 5 years at 10% requires

a lump sum premium contribution of

Kshs 1,000 at age 60 years. This can be

used to calculate annuity amount for

any purchase price.

Women have a higher life expectancy

than men and therefore annuity rates

for women are lower.


InsuranceCompany

Issues the contract, provides

contract information, allocates

the money as instructed by the

owner and is responsible for the

guarantees.

Owner

Makes the decisions about the

annuity, such as how much money

to invest and how it should be

allocated. The owner also names

the beneficiaries.

12

Annuitant

The owner and the annuitant may

or may not be the same person.

Either way, it’s the annuitant’s life

expectancy that is used to set

the amount of future annuity

income.

Beneficiary

The beneficiary is the person who

has the right to receive the death

benefit if the owner or annuitant

dies before income payouts begin

or before the guaranteed

period of payment ends.

WHOISWHOIN AN ANNUITY?

The following are the parties

involved in an annuity contract:



WHICHCOMPANIESOFFERANNUITIES?

13

NAME OF COMPANY PHYSICAL ADDRESS TEL NO. (020) EMAIL ADDRESS

APA Life Insurance Ltd Apollo Center, Off Ring Road. P.O.Box 30389-00100 Westland, Nairobi.

3641000 [email protected]

Barclays Life Assurance Kenya Limited

Westlands Office Park, Off Waiyaki Way, Accacia Building, 3rd Floor, Nairobi

+254 700 590 039 [email protected]

Britam Britam Center Mara/Ragati Road. P.O.Box 30375-00100 Nairobi.


Capex Life Assurance Company Ltd

5th avenue Office Suites, Ngong Road, Box 12043-00400, Nairobi

2712384/5 [email protected]

CIC Life Assurance Company Ltd

CIC Plaza, Mara Road. P.O.Box 59485-00100, Nairobi


Corporate Insurance Company Ltd

Corporate Place, P.O.box 34172 Kiambere Road, Nairobi, Kenya


First Assurance Company Ltd

First assurance hse, Gitanga Rd. P.O.Box 30064-00100 nairobi


Geminia Insurance Company Ltd

Geminia Insurance Plaza, Kilimanjaro Avenue, P.O Box 61316-00200, Nairobi


ICEA LION Life Assurance Co.Ltd

ICEA LION Center, Riverside Park, Chiromo Road. P.O.Box 46143-00100 Nairobi.


Jubilee Insurance Company Ltd

Jubilee insurance house, wabera street. P.O.Box 30376-00100 Nairobi.


Kenindia Assurance Company Ltd

Kenindia house, Loita Street. P.O. Box 44372-00100 G.P.O Nairobi.


Kenya Alliance Insurance Company Ltd

Chester Hse, Koinange street. P.O.Box 30170-00100 GPO, Nairobi.


Kenya Orient Insurance Company Limited

Capital Hill Towers, 6Th Floor Cathedral Road, Nairobi P. O. Box 34530 - 00100 Nairobi


Liberty Life Assurance Ltd Liberty Hse, Mamlaka Rd. P.O.Box 30364-00100 nairobi, Kenya.


Madison Insurance Company Ltd

Madison Insurance Hse, Upper hill Close. P.O.Box 47382-00100, Nairobi.


Metropolitan Cannon Life Assurance Company Ltd

Gateway business park, Mombasa Road. P.O.Box 30216-00100 Nairobi


Monarch Insurance Company Ltd

Monarch hse, 664 ole Nguruone Avenue. P.O.Box 44003-00100 GPO Nairobi, Kenya.


Old mutual Life Assurance Company ltd

Old mutual Building, Corner hse Mara/hospital Road. P.O.Box 30059-00100, Nairobi.


Pan Africa life Assurance Company Ltd

Pan-African Hse, Kenyatta Avenue. P.O.Box 44041-00100 Nairobi.


Pioneer Life Assurance Company Ltd

Pioneer Hse, Moi Avenue. P.O.Box 2033-00100 Nairobi



14

NAME OF COMPANY PHYSICAL ADDRESS TEL NO. (020) EMAIL ADDRESS

Prudential Assurance Company Ltd

5th Ngong avenue Off Ngong road. P.O.Box 25093-00100 Nairobi, Kenya.

2712591/2/3/6 [email protected]

Saham Assurance Company Ltd

Ecobank towers,Muindi Mbingu street. P.O.Box 20680-00200 City square


Takaful Insurance of Africa Limited

CIC Plaza, 3Rd Floor, Mara Road, Upper Hill P. O. Box 1811-00100, Nairobi

254 (20) 2725134/5 [email protected]

UAP Life Assurance Company Ltd

UAP insurance company Limited Bishop Gardens towers, Bishop Road. P.O.Box 43013-00100 Nairobi, Kenya



Association of Kenya Insurers

AKI Centre, Mimosa Road, Muchai Drive, Off Ngong Rd

P.O. Box 45338-00100 Nairobi, Kenya

Tel: +254 20 2731330-3, 2630295

Mobile: +254 722 204 149, 733 610 325

Email: [email protected]

Website: www.akinsure.com

o Annuities A Guide To Annuities - AKI guide to Annuities.pdfdriven by private business ownership....

Documents

Transcript of o Annuities A Guide To Annuities - AKI guide to Annuities.pdfdriven by private business ownership....