Even though they're created, marketed, managed and guaranteed by insurance companies annuities aren't insurance. An annuity is really a way of ensuring payment to a beneficiary not an policy . Unfortunately many of us confuse them with insurance because they'll provide a number of an equivalent benefits as policies.
Annuities vs. Insurance
An annuity may be a contract that obligates an insurance firm to form payments to a beneficiary for a selected period of your time . The payments are usually funded by money wont to purchase the contract. These funds are often supplemented or increased by investments within the stock exchange or bonds in some classes of annuity like indexed or variable contracts.
The main difference between an annuity and an policy is that the funds within the annuity need to be paid out. the cash in an policy is merely paid if a particular risk occurs for instance the death of an individual covered by a life policy. Annuity payments are made automatically. Another difference is that an annuity can gain in value most contract earn interest at a hard and fast rate sort of a bank account . Variable or indexed contracts are often invested in other vehicles like stocks or bonds.
A final difference is that the basic purpose of the 2 instruments. An policy is meant to insure against risk. An annuity is meant to guard and preserve income and make sure that it reaches the person it had been intended for.
Insurance Aspects of Annuities
Part of the rationale why people get confused is that annuities have some aspects or characteristics of insurance. they're an insured investment the insurance firm guarantees payment. during a lifetime annuity the corporate guarantees a lifetime stream of income.
Many annuities also contain an insurance benefit. Some contracts contain a life assurance policy that guarantees a benefit . Such a feature is really a separate policy that's purchased at an equivalent time.
Most annuity contracts also are regulated by an equivalent state agencies that regulate insurance. State governments also insure the contracts. It should be noted that variable annuities are now regulated by the Securities and Exchange Commission because they're considered an equity and not insurance.
Longevity Insurance
Some people also use annuities as a sort of policy . Some contracts are even marketed as "longevity insurance." this suggests are sold as a source of guaranteed income for older people.
The idea is to supply an individual with a permanent source of income to reinforce savings and Social Security . this is often not an policy because it'll disburse . albeit it protects an individual against a risk (outliving his or her money) it also provides a daily income.
Another quite contract that gives a kind of insurance is an indexed annuity. Some indexed contracts have provisions that are alleged to protect beneficiaries against market losses. the supply locks in higher rates of return from bull markets therefore the funds within the contract won't go down during bear markets. the thought behind this is often to ensure a gentle stream of income for the beneficiary despite market performance. Such a provision are often thought of as a kind of insurance against the danger of market losses.
Even though they will contain insurance features and serve a number of an equivalent purposes as insurance policies annuities aren't insurance. Instead they're investment designed to supply additional income for beneficiaries.
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