Features of Annuities

Annuities features are different from insurance. Under a contract of annuity, the annuitant agrees to pay a specific capital sum insured to the insurer. The insured has the option to pay the annuities in instalments. The amounts collected by the insurer are known as annuity funds and are invested for a certain expected return.

The insurer in turn agrees to make regular payments to the insured as long as the annuitant is alive. The benefits are calculated by the insurer based on the law of large numbers and the percentage of returns on capital. In the event that the annuity fund has more than the expected returns, the balance earnings is returned as bonus to the insured.

There are various types of annuities.

·      Single life annuity is payable until the death of the annuitant.

·     Joint life annuity pays during the life time of the annuitant or his spouse whichever is longer.

·    Revisionary annuity pays annuity till the death of the annuitant. After the annuitants death, 50% annuity is payable to the spouse until the spouse lives.

·    Annuity Certain pays definitely for a fixed number of years. After that it pays the annuitant only as long as he is alive.

Old and retired persons may not have a source of earning, may not have savings or even retirement benefits. Annuity has the advantage that it can cater to the needs of the old and retired persons. However, the limitation here is that annuities usually have an upper limit and therefore may not become a comprehensive source of earning. This has to be taken into consideration while planning for retirement.