An Immediate annuity is probably what most people first think about when they hear the word annuity, although there are so many different types (as we’ve been discussing) that it depends on which ones you’ve encountered as to which comes to your mind. Probably the first type of annuity was the Immediate Annuity. This product is a simple exchange between you and the insurance company.
The immediate annuity came about because people would retire and have a certain amount of money, but have no idea how long they would live. Meanwhile, the life insurance company would have expertise in assessing mortality risk and managing capital.
The exchange (immediate annuity purchase) would benefit both parties. The consumer would pay a certain amount of premium (his nest egg) to the insurance company in exchange for a promise to pay that person (or couple) a lifetime stream of income for as long as one (or the last) should live.
A pure Immediate Annuity is simply based on lifespan. If the person (or couple) dies soon, the insurance company made a large profit. If the person (or couple) lives really long lives, the consumer(s) did very well on the exchange.
Either way, the consumer received peace of mind because they knew they would have income no matter how long they lived. The insurance company knows that it might make or lose money on any particular customer, but that overall they will make a margin of profit.
Later, people decided it wasn’t fair that they might die the day after they bought the policy and that all those dollars would be lost. To compensate this fear, the insurance companies came up with….
Period Certain Payouts – In this payout format, you would receive a lifetime payment, but your family would be sure to receive at least X number of years of payment. Perhaps 10 or 20 years. Each company has different offerings. Of course, if you want this option, you have to be willing to take a smaller monthly or annual payout since the company takes on more payout certainty.
This can be the right solution for the right person however, there are options on the other types of annuities that have made this type of annuity a bit antiquated for most clients in our minds in part because there is no liquidity and no going back once you purchase this type of annuity. You have turned your principal into a stream of future payments and that decision is irreversible (unlike a similar option that exists which will discuss soon.) Monday, we’ll look at fixed annuities and variable annuities.
This is the 6th post in our series of innovative new insurance products. You can find the previous posts at: 1) Innovative Insurance, 2) Long Term Care, 3) Long Term Care Solutions, 4) Free Long Term Care Insurance, & 5) What is an Annuity?