Tuesday, March 26, 2013

What is an Annuity?

An annuity is the OPPOSITE of life insurance!
  •  Both are bets you make with an insurance company, but they are opposite sides of the bet. With a life insurance policy you are betting that you will not live past your actuarial mortality date*.  With an annuity you are betting that you will live well past that date. 
  • With a life insurance policy you pay a monthly premium so that your heirs will get a lump sum payout when you die.  With an annuity, you pay a lump sum up front and get a monthly payout for the rest of your life.  If you are right, you may well get much more back over your lifetime than your original lump sum.
  • When you are young and employed and have a young family, life insurance is a way of providing income to your family even if you are not around to earn a salary.
  • When you are older and the kids are grown and out of the house, it may be time to reverse your bet.  Plunking down a lump sum for an immediate annuity means you will get a monthly check for the rest of your life whether you continue working or not.
  • When you are older and your assets have grown, they may well exceed the value of your life insurance policy.  Moreover, premiums for term-life insurance become prohibitively expensive the older you get.  Do you still need to keep paying for that life policy or do you want to get paid just for living a hopefully long and fruitful life?
* Your “actuarial mortality date” is that point in the future when half the people your current age and gender will already be dead.

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