24/10/2022
ANNUITIES
Annuities are periodical payments made to a person either out of investment or a pension fund. In an annuity contract, the purchaser pays in advance a lump sum to the insurance company (like a deposit) with the understanding that from a particular date, the insurer will pay back the capital in installments with interest over an agreed period or for life.
The installment payback is known as annuity, and the recipient is known as annuitant.
It is called annuity certain if the payment is to be made for a specific period. A life annuity is when the payment is to be made until the death of the annuitant.
Contingent annuity- This is when payment becomes due to a person upon the death of another e.g. an annuity paid to a widow following the death of her husband.
Life annuity is used by insurers to provide pension payments.
TYPES OF ANNUITIES
1. ANNUITY CERTAIN
A purchaser pay for instance, N1,000,000.00 ( purchase price) to an insurance company and expects the annuity to be paid to him over ten years. The insurer pays the annuitant an annuity of N150,000 a year over a period of ten years certain whether or not the annuitant is alive. The annuitant must have received a total of N1,500,000.00 at the end of the 10 year period. On each payment, N100,000 constitutes a return of his capital, while N50,000 constitutes the income element (or profit)
In an efficient tax system, the N50,000 per annum is treated as income for taxation purposes, while the N100,000 capital element is treated as return of his capital and therefore not taxable.
2. LIFE ANNUITY
On life annuity, on payment of the purchase price of N1,000,000 by the annuitant, the insurer will apply some actuarial principles with regards life expectancy in determining the interest payable. Depending on the age of the purchaser, the annuity may be between N105,000 and N110,000 or even less per annum because it is not certain how long it will be paid.
If a 50 years old person buys such an annuity and happens to live up to 90 years, it means the annuity must have been paid for 40 years. At the rate of N110,000 per annum, it means that a total sum of N4,400,000 would have been paid by the Insurer. It could also happen that the annuitant dies after only 5 years, in which case, only N550,000 would have been paid out. For this reason, there is always a guaranteed period in a life annuity contract, hence a guaranteed annuity.
In a life annuity, there will usually be a guaranteed period of say 5 or 10 years during which the annuity must be paid whether or not the annuitant is alive. In effect if the guaranteed period is 5 years, and the annuitant dies after 2 years, the estate or the dependant survivor will receive the annuity for the remaining guaranteed period of 3 years. If the annuitant lives longer than 5 years, the annuity will be paid until death.
Annuities may be paid monthly, quarterly or yearly.
The purchase price needs not be paid only once or en bloc. It could be paid over a period, while the date of commencement of annuity may be deferred. For example, a 30 or 40 years old may pay the purchase once or in installments, but the annuity may commence at the age of 55 or 60, for a period certain or for life.
WHY PURCHASE AN ANNUITY?
Annuities are often purchased for retirement income, investment purposes, personal pension and payment of school fees.
APATHY TOWARDS ANNUITY
The lack of public confidence in the insurance system, unstable interest rate regime, high rate of inflation and dominance of the capital market by other sub-sectors of the financial services industry are the bane of the insurance subsector.
WHY MUST I DO IT?
The Pension Reform Act 2004 as amended by the Pension Reform Act 2014 has made life annuities a mandatory option for payment of pension to retirees.
Honestdeal Insurance Brokers Limited
Contact us on 08023154620 and 08135553637
Email: [email protected] and [email protected]
