When you buy an annuity, you pay a certain amount of money called an insurance premium. This premium can be paid all at once in the beginning (called a single premium annuity), or it can be paid in installments (a flexible premium annuity). When an insurance company receives the premium from you, the premium is gathered and collected, or pooled, with the premium paid by all of the other people that buy annuities from the insurance company. This money that is gathered together from all of the annuity buyers is then invested by the insurance company, and from the earnings, the insurance company makes payments to the annuity beneficiaries, and to themselves for managing and administering the annuities.
There are four parties that then have an interest in your annuity and the premium you used to purchase this annuity:
1. The Annuitant – That’s you, and your interest is created because it is your money that was invested in this annuity, and the one that decides who receives the payments from this annuity.
2. The Insurance Company – Their interest is created because they received your premium (money) and invested it and used those earning to pay you, themselves, and other annuitants.
3. Other Annuitants Who Purchased At The Same Time – Some annuitants will live longer than others. The money that is not paid to the shorter lived annuitants is used to pay those that do live longer.
4. Your Heirs – If you opt out of the guaranteed period, or if you live past the guaranteed period, then your heir, or your estate receives nothing. That money is used by the insurance company to pay the benefits guaranteed to the longer lived annuitants.
The payout amounts from your annuity come from three sources:
1. The premium you receive back from the insurance company. This amount is prorated over the estimated number of years you are expected to live, and consists of a percentage of each payment you receive.
2. Interest on your premium that the insurance company made by investing your money wisely and safely.
3. Money that was not paid to other annuitants that did no live as long as you.
There are many things to watch out for when purchasing an annuity. Financial Planners and Investment Advisors dislike annuities, and spend a lot of time trashing annuities, even while they have no compunctions in selling variable annuities themselves, the worst type of annuity for the consumer. There is a lot of bad information out there regarding annuities, but, a single premium immediate annuity, which is the most insurance-like annuity there is, can be the best solution for creating an income stream after retirement.
Tags: annuities, Annuity, consumer advice, Financial Services, Health Insurance, insurance quotes, Investing, Investments, Life annuity, Life Insurance, Personal Finance, Single Premium Immediate Annuity, SPIA, variable annuity
