In the past, annuities did not have protection over inflation. However, this is another era, banks and other investors are providing inflation-protected annuities. It is important to understand the of annuities, and the calculations that come along with them. Some people invest in annuities blindly without knowing much about them. Before visiting that insurance company, it is important to visit an investor to in order to get more advise on annuities. This will help clarify any questions, advantages, and disadvantages of annuities.
Purchasing annuities
This is simply a covenant between an insurance company and a contract holder. The guarantee that the contract holder has is the assurance that they will pay a certain amount of money on the expiry of the contract; these financial arrangements are also referred to as income annuities. This type of annuity is most common with retirees. This is because they want to secure their future life after retirement. The insurance company will provide the contract holder with retirement income in order for them to maintain a certain standard of living after retiring. The challenge that retirees face with annuities is that since the annuity is fixed, the money will be worth less in the future. For instance, a dollar today is worth less tomorrow. This means that the income will not be able to purchase the same thing tomorrow due to price increases.
Inflation protection
Inflation-protected annuities are different from other types of annuities in that they protect the retirees’ income from inflation. This has a feature they call “real rate of return”. This refers to the rate of return after deducting inflation. The amount that the insurance company promises the contract holder, which they refer to as retirement annuity payment, will increase in line with the inflation rate. For instance, if a product is worth a dollar today and two dollars tomorrow, then the contract holder will be paid a dollar today and two dollars tomorrow due to inflation.
Although this is a new feature in the investment business, the concept has been there in some systems like the Social Security retirement benefit only that it is a different name but the same concept. In this case, the social security retirement benefit determinant was the cost of living. When the cost of living goes up, Social Security retirement benefit increases at the same percentage rate.
Types of annuity payment methods
Lifetime annuities are annuity payments that continue for the rest of the retirees’ life until their death. Most people who are healthy at their retirement age go for this type of annuity because chances are that they will live long. This is because, death comes due to health problems, which get worse when people age.
Guaranteed years annuity: In this type of annuity, annuity payments take effect for an agreeable period. If the retiree dies before the time elapses, the next-of-kin will benefit from the payments. Most people go for this type of annuity because of the retirement plan. The retirees would like their family members to benefit from the scheme when they die instead of the money going down the drain. Joint
Annuity: retirement annuity payments will go to the contract holders, but when one person dies, the other holder gets the same amount. There are no benefits from the other party.
Joint guaranteed year’s annuity: Retirement annuity payments for this type of annuity are for contract holders. In case one dies, the heirs of the deceased will benefit from the payment scheme. This type of annuity is beneficial to the next of kin after the death of the contract holder instead of the insurance company.