Life annuity – What it is, definition and concept

A life annuity is a type of annuity paid by an insurance company to its insured. That is, a certain economic amount that the insurer pays to its client over a period of time until the death of the saver.

In simple terms, the life annuity is the income that a retiree receives, from his insurer, until the end of his life.

When a person leaves the labor market due to retirement, their sources of income change. These new sources of income can be a pension granted by the State or other types of income that come from investments made by the retiree.

One of the products that insurance companies offer to workers are savings plans. The objective they have is that the client makes certain contributions, periodic or punctual, and can receive remuneration when he retires.

This remuneration is usually in line with the premiums paid. It also carries an associated extra profitability for having left your money for certain years to the insurance company to manage it.

In this article we explain what the life annuity is. It is a remuneration paid by insurance companies to their clients from the moment of their retirement until their death. To obtain this life annuity, the insured must take out the plan and make the capital contributions required by the insurer.

Once the time for retirement arrives, the insurance company will be in charge of making the agreed transfers on the agreed dates so that the retiree can supplement their income.

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Characteristics of the life annuity

These are the main characteristics of the life annuity:

  • It is a remuneration that the insurance company pays until the death of the client or until an event occurs that allows the termination of the policy.
  • Payments can be made on a monthly, quarterly, semi-annual or annual basis.
  • It is a fairly safe product since the insurance company undertakes to refund the amount paid and an extra return.
  • There are different types of life annuity insurance in which you invest in more or less secure assets.
  • It allows the client to save the agreed amount over a period, ensuring that they have that money when they retire.

Advantages and disadvantages of the life annuity

Among the advantages that we can find with this type of annuity are the following:

  • It allows the insured to save and guarantee a future income.
  • They offer a return on the money deposited.
  • In the event of death, the family will generally recover 100% of the amount contributed plus a return.
  • The insured does not have to be aware of the investments made with their money.
  • Unless the savings plan makes investments in variable income, the profitability will be agreed upon at the time the plan is contracted.

The disadvantages of the life annuity are as follows:

  • It is difficult to redeem the money paid before the agreed date. In case of wanting to rescue him, a high penalty will be paid.
  • If the profitability is fixed, in periods of high inflation, the price increase can absorb (exceed) the return completely.
  • When the premiums paid are invested in fixed income, the return offered to the saver is usually low.
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In conclusion, the life annuity is the economic amount that an insurance company pays to its insured from the moment of his retirement until his death. It allows the retiree to have an extra income that complements his pension.

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