Types of Annuity

The most widely used is the immediate annuity, where in return for the capital sum the company guarantees to pay a stipulated income to the annuitant for life. Normally, the annuity is paid in half-yearly or quarterly instalments in arrear, but offices may agree to pay at monthly intervals or in advance, or both, in which case the annual total will be slightly lower. If the last payment is due on the last payment date preceding death, it is described as an annuity "without proportion". If a final proportionate payment is made for the period between the last due payment and the date of death, then the annuity is called "payable with proportion". With-proportion annuities give a slightly lower return and are rarely quoted.

Annuity rates vary continuously with the current rate of return from long-dated Government securities and other fixed interest investments, and are regularly adjusted by companies. When interest rates rise, annuity rates will rise and vice versa. At any one time there is likely to be a big difference between the best and worst rates quoted for a given age and the assistance of a competent adviser is necessary to secure the best terms. Again, as with income bonds, it is worth emphasising that if interest rates are on a rising trend there is no advantage in taking out an annuity and it is much better to make the purchase when interest rates are either stable or starting on a downward path.

No medical questions are asked of prospective annuitants (the earlier the annuitant dies, after all, the better for the office), but proof of age is always required at the outset. Rates for men and women differ significantly because of women's greater longevity. Some offices will quote improved rates for medically substandard lives, but often the cost of providing the medical information falls on the annuitant.

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Principle of Annuity Income

A normal life insurance policy involves the payment of regular premiums by the policyholder in return for a final cash benefit on maturity or death. The annuity simply reverses this situation, in that the life insurance company guarantees, in return for a lump-sum payment, to pay a regular income to the annuitant until his or her death. On taking out an annuity, the annuitant therefore loses control of the capital invested.

The principle of annuities is simple enough, and even the British Government issued them until as recently as 1992. From the mortality... see: Annuities

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