Annuity Definition of “Safety”

Annuities are of different types and hence it may be difficult to offer a single common annuity definition. The least we can do to achieve clarity is to find out what the synonyms are for the different types of annuities and explain their safety profiles.

It is expected that retirees would wish to add to their income, to have sources in addition to social security and pension income. The annuity, being an insurance product, can provide a lifelong income. Retirees can invest these amounts to yield a regular income or they can annuitize to provide an income which cannot be outlived (annuity payments continue for life).  But retirees who are in their autumn years must consider how safe annuities are.  So one annuity definition, that for an immediate annuity, is one that provide a stream of income, for as long as you live (should you opt for the lifetime income which is not a forced requirement).

Annuities can be deemed safe and the life long income guaranteed as they are issued by the insurance companies. When viewed holistically, their massive issuance of annuity contracts will facilitate mortality statistics to govern all possible payout obligations. All that the insurance companies have to do is to keep their funding operations, investment plans, and overall finances in a tidy manner to easily meet obligations. As such, life insurance companies are considered some of the safest financial institutions in the world. So the annuity definition of safety when it comes to life insurance companies is one that sticks to life insurance products and services and does not go off track like AIG.

There are several credit agencies that rate the financial stability of each insurance company and insurance companies are regulated by each State.  Nonetheless, companies can still fail to their obligations – though this possibility is rather remote and no person has lost money with a life insurance company in this author’s lifetime.

Retirees would either favor an annuity that entails monthly or quarterly payment or delaying those till they further age. The second option may be described as a form of insurance against lack of financial resources if they live too long. The annuity definition, that of a deferred annuity, is one which a premium is paid and payments are deferred until later. Recent surveys reveal that retirees have a 50% chance of living for more than 20 years beyond the age of 65. The negative aspect is that lifetime annuities may leave nothing for the beneficiaries.

We have the annuity definition for two types of annuities so far, for immediate and deferred annuities.  However, either of these may be of two types – fixed annuities or variable annuities. The fixed annuity definition  means that the insurance company guarantees your original deposit amount on which it pays you a rate of interest every year.To assure your constant income, these contracts depend on long-term interest obligations from high grade bond investments.

The greatest blessing of a fixed annuity definition is you are guaranteed of regular constant income lifelong.  But you need to understand that if you live 20 years or more, even marginal inflation rates can substantially devalue that income stream as it will purchase less.

As regards variable annuities, the payouts can be affected by market fluctuations and this means your principal amount will vary as per market volatility. Of course, these can also provide you a lifelong income – but that income will not be a constant figure. The simple reason is that variable annuities are like mutual funds and funded by variable accounts whose values regularly fluctuate.  So the annuity definition for  a variable annuity could be an immediate or deferred arrangement with an end value of payments that are variable, depending on the investment selections made.

So, it must be borne in mind that the risk factor of variable annuities is high. Retirees who are willing to take more investment risk can choose a variable annuity. A more sensible approach would be to split the savings – investing partly in a fixed annuity and investing the balance in variable annuities.

Last, there are indexed annuities, the annuity definition of which is a hybrid of a fixed annuity and variable annuity.