7.1 Purpose and Function of Annuities
Annuities provide cash contracts with an insurance company that are based primarily on equity investments and should be undertaken only as a long-term program.
An annuity's basic purpose is to liquidate an estate through periodic payments. The intent is to provide income later in life, at some future point in time to the "annuitant." An annuity can be structured to provide a particular sum of money (principal income payments) at regular intervals for a designated amount of time or for an entire lifetime. Annuity income can be used for retirement or to provide a stable income for the remainder of a surviving spouse's life. Annuities can be tailored to specifically suit individual needs.
For instance, an immediate annuity can be purchased that provides income right away (immediately).
The amount of an annuity payment is based upon the three following factors.
- Starting principal
- Interest
- Income period
ILL 11.1, page 202 of the Florida study manual gives an excellent illustration of how to determine how much income can be generated utilizing the starting principal, figuring the interest, and finally determining the income period produced.
Life insurance companies are uniquely qualified to guarantee annuity payments due to what is referred to as the survivorship factor, which is akin to the mortality factor in a life insurance premium calculation.
An annuity can actually be looked at as the opposite of a life insurance contract. A life insurance contract is based on and designed around the insured's death, at which time proceeds will be paid out. An annuity is based on and designed around life.
A life insurance policy is based on creating an estate, whereas an annuity is based on liquidating an estate.
Life Insurance: BUILDING an estate
Annuities: LIQUIDATING an estate
