Posted in Finance, Accounting and Economics Terms, Total Reads: 262
Definition: Life with Guaranteed Term
A life annuity is a financial instrument in the kind of an insurance product in which the seller (issuer), usually a financial institution like bank or a life insurance company makes an annuity of future payments the buyer (annuitant/beneficiary) in exchange for a lump sum payment or even a series of regular payments, prior to the maturity of the term.
The annuity payments from the issuer to the beneficiary have an unknown period based mainly upon the time of death of the beneficiary. At that point of time, the contract will expire and the remainder of the funds accumulated over the period is forfeited unless there are some other beneficiaries of the contract. Thus a life annuity is a type of insurance, where the uncertainty of a person's lifespan is transferred from that person to the insurer, which reduces its’ own uncertainty. Annuities are generally purchased to provide an income after retirement.
There are two phases for an annuity:
• The accumulation phase where the customer deposits and accumulates money into an account;
• The distribution phase where the insurance company makes annuity payments till the death of the beneficiaries mentioned in the contract.
• Fixed and variable annuities
• Guaranteed annuities
• Joint annuities
• Impaired life annuities
Suppose a person at the age of 60 comes to know that he is suffering from Cancer has just few years left in his life. He decides to do Life with guaranteed term as his wife does not mistakenly uses all the money once and faces trouble in the future. Instead she gets a regular annuity after predetermined period and spends her remaining life peacefully.
• Guaranteed regular income payments that last till the the rest of his or her life