Annuities are not life assurance contracts since such contracts do not base on the longevity of a man’s life. The element of risk coverage is not there, so, the policy does not pay a capital sum on a man’s death. This is not even the intention of the annuitant either. Instead, it would be seen that normally payments are rather stopped on the annuitant’s death. This is why normally it is said that the more and more impaired an annuitant’s life would be, the more favorable term he would receive from the insurers. Even though annuities are not life assurance contracts, nevertheless, such contracts are conventionally issued by life offices.
What Is Annuity?
Annuity is a contract in between the insurance company (i.e., the party granting the annuity) and the annuitant (receiver of annuity) whereby in consideration of the payment of a purchase price by the annuitant, the other party undertakes to make on yearly or annual payment to the annuitant from a certain predetermined time until the annuitant’s death or for a fixed period.
Different Types of Annuities :
There are various types of annuities available in the market and the most common ones are:
i) Annuity for Life: This is the basic original type of annuity. Under this, the yearly payment starts from a particular date and continues until the remainder period of the annuitant’s life. The payment stops from the death of the annuitant.
ii) Annuity Certain: Under this type of contract the annuity is given for a certain predetermined period irrespective of the annuitant’s life. The payment stops as soon as the period is over even though the annuitant is still surviving.
iii) Guaranteed Annuity: Here the annuity continues until the annuitant’s death but is guaranteed for a certain minimum period. This means that if the annuitant dies before the minimum period then annuity will still continue until completion of the minimum period. The students should realize that this type of annuity is almost similar to —annuity for life”, the only difference being that the annuity will not stop until the minimum guaranteed payments are made. This means that, unlike annuity for life, payments may continue even after the death of the annuitant when such death takes place before the minimum period. On the other hand, if the guaranteed period is over, like annuity for life, the payment continues and stops on death.
iv) Reversional Annuity: Under such of contracts, payment to the annuitant starts from the time of death of another person mentioned in the contract. Then payment continues for the remainder of the annuitant life.
v) Joint & Survivor Annuity: Under this contract the payment starts from a particular time and continues throughout the duration of the joint lives. On the death of the first life, the payment still continues, may be at the same rate or at a smaller rate, until the death of the second life. So long discussions have been made as to the various types of annuities, and simply indications have been made that payment is to start from a certain predetermined time. As to this starting time two methods are in practice, viz,
a) Immediate Annuity: Irrespective of the type of annuity, against payment of a single purchase price by the annuitant, the annuity payment will start immediately. Deferred Annuity Irrespective of the type of annuity, payment to the annuitant starts from a later predetermined date.
b) Deferred Annuity: Irrespective of the types of annuity, payment to the annuitant starts from a later predetermined date.