3 Benefits of Annuity in 2024
3 Benefits of Annuity in 2024
Essentially an annuity can protect us against three important risks: longevity risk — the risk of living longer than our life expectancy; market risk — the risk that our income will fall if stock prices or interest rates go down; and what we might call judgment risk — which is the risk that we, ourselves, might do something stupid to harm the lifetime income stream on which we depend.
What is an Annuity?
The crisis made the risks faced by retirees especially plain: their investments may dive at the worst possible time, the timing of subsequent gains may not suit, and they may live longer than expected.
Retirees are looking for new ways to invest their money in retirement other than in share-heavy portfolios.
Most retirees don’t have 20 years to wait for a sustained sharemarket rebound, so products such as annuities can be a fit for retirees.
In finance, the word “annuity” refers to a series of payments made to a person (called the “annuitant”) for life or for a set number of periods.
In this article we refer to a fixed, life annuity, a plain vanilla annuity that will guarantee a set income each month for the rest of your life, no matter how long you live or what dumb mistakes you make along the way.
If this guarantee looks familiar, it should, since it is pretty much what we get from Social Security as well as from a traditional “defined benefit” pension — if we are lucky enough to have one. Both are forms of life annuities because both pay until you die.
Annuity eliminate Market Risks
Since payments are fixed, Single Payment Immediate Annuity (SPIAs) eliminate market risk. Since they pay you for life, even if you live to be 105, they eliminate longevity risk. And since many can’t be cashed in, they eliminate judgment risk. A few companies will sell them with inflation protection as well (at extra cost).
Single Payment Immediate Annuity More Guaranteed Income
For those seeking to supplement their lifetime income, SPIAs offer the huge benefit of generating much more guaranteed income than any other type of investment.
Is my money safe with the Insurance Company I buy an Annuity?
Life insurance companies that issue annuities are highly regulated by the states in which the policies are issued and are generally considered to be conservative and safe. States also have insurance funds with limits ranging from $100,000 to $500,000 to reimburse annuity holders in the very unlikely event that an insurance company fails. You can further protect yourself by diversifying annuity companies — in other words, splitting your money between two or more highly rated providers.
Can I leave money to my heirs if I buy an annuity?
It is possible to have a survivor benefit on a straight life immediate annuity. That choice does reduce the payments to the annuitant, but it does leave funds for heirs.
When to Buy an annuity?
Retirees should look to distinguish a good annuity from a bad one in the same way investors—some of them, anyway—eschew expensive mutual funds in favor of low-cost index trackers. In that world, buying an annuity, at least to cover the basic expenses that arise during retirement, will become a routine, uncontroversial decision.
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