ANNUITY

An annuity is an insurance contract which is designed to provide periodic income to you as a holder for the rest of your life normally after retirement. You can buy an insurance contract from our insurance agency. It requires you to pay out a fixed or variable income stream to the purchaser. It may either begin at once or at some time in the future. You can acquire the contract as a single annuitant or jointly with a spouse. The payouts will continue until the death of the last survivor.

Minimum entry age

The minimum age at the commencement of the policy is 50 years and above. It can however be earlier in case of termination of employment, as a result of incapacitation
due to illness or an accident. A spouse can also purchase an annuity, at any age in the unfortunate event of death of a pension scheme member.

Minimum purchase price

The minimum purchase price of the annuity is Ksh. 600,000. This has been set to enable you as an annuitant to get a considerable regular annuity payment.

Annuity requirements

• A dully completed proposal form.
• Lumpsum amount for purchase price.
• A copy of your national identity card.
• A copy of an ATM card or a cancelled cheque for verification of bank account details.

People invest in annuities or purchase them by making monthly premium payments or lump-sum payments. This converts into a series of regular income payments to the annuitant for a life time. To purchase an annuity plan, you may pay an insurance company a lump sum premium just before retirement. Alternatively, you can make periodic premium payment until your selected retirement age. Upon retirement, the insurance company will provide income payments for the rest of your life.

You can use it as a form of retirement savings. It helps you as an individual to escape the risk of outrunning on your savings.

There are different kinds of instrument in which annuities can be structured which gives them their flexibility. It can be categorized as immediate or deferred, fixed or variable, and indexed.

Immediate Vs Deferred

Annuities can be immediate or deferred. An immediate annuity plan is a plan that provides you with regular income immediately after buying the plan. You can buy an immediate annuity at any age especially when you have received a large lump sum of money. This may include a settlement or lottery win, and you prefer to exchange it for cash flows into the future.

Deferred annuity plans enable you to save money during your earning years and earn income during your retirement. In a  deferred plan your income starts at a later date and you can choose when you want the income to start. If you still have a few years before you retire and are between 45 and 58 years old, this type of annuity may be beneficial for you. Deferred annuities are structured to grow on a tax-deferred basis. This provides you with guaranteed income that begins on a specified date.

Variables Vs Fixed

Variable annuities allows you as the owner to receive lager future payments if investment of the annuity fund do well and receive smaller payments if the investments do poorly. This means a less stable  cash flow than a fixed annuity. But it allows you to reap the benefits of strong returns from your fund’s investments.

Fixed annuities annuity does not get affected by market fluctuations, hence your income is a fixed and the amount is guaranteed. This amount is pre-decided by you at the time of purchase of the policy. Fixed annuities provide a guaranteed minimum rate of interest and fixed periodic payments to the annuitant.

It’s advisable to consult with professionals when buying an annuity insurance cover and understand how they work. Since they often come with complicated tax considerations. 

Annuity Options

Guaranteed period of payment

You can receive a guaranteed period of payment on the contract, such as five, ten, or fifteen years. This will depend on the length of time for which specific payments are assured.. Whether the annuitant survives this period or not. If the annuitant dies before the contract matures, the balance of the guaranteed payments is paid to the appointed beneficiary.

Annuity without guaranteed period

In this form, the annuitants pays a fixed regular income for their whole life. It does not have a specified period.

Annuity with a guaranteed period

This form pays a fixed regular income for either the rest of the annuitant life or for a specified period of time which ever is longer. In this case, if you purchase a 15-year annuity and unfortunately die after 10 years, your beneficiary will continue to receive the payments for the remaining 5 years.

In case you outlives the period of 15 years, you will continue to receive the income for the rest of your life.

Increasing annuity

In this form of annuity, it gives an income which increases each year at a specified rate. This helps the annuitant income from inflation throughout the years. Normally the starting income of an increasing annuity is lower, but it later increases in the future.

Joint- life annuity

This is a form of annuity where by it gives an annuitant an income for the rest of their life and after their demise it continues to pay the income to their spouses to the rest of the spouse’s life. But the spouse’s income might be at a reduced rate.

Parties involved in an annuity contract

Insurance companies exclusively issue annuity contracts in Kenya. The following parties are involved in an annuity contract:

Insurance Company

An insurance company usually issues the insurance contract and provides the contract information to the client. It also allocates the premiums as instructed by the owner. The insurance company is also responsible for income payments for the annuity.

Annuitant

An annuitant is the person who receives the benefits of an annuity insurance, this may either be the owner or a different person whom the owner took the insurance for. Nevertheless, they use your life expectancy as the annuitant to set the amount for the future annuity income.. You are eligible to take an annuity cover for your spouses, parent or even sibling.

Beneficiary

A beneficiary is the person who has the right to receive the death benefit in case the owner or the annuitant dies before income payouts begin or before the end of the guaranteed period of payment.

How the insurer determines an annuity amount.

Insurance companies primarily determine annuity prices based on mortality tables, investment returns, and administrative expenses. The amount of income payment an annuitant will receive usually depends on the prevailing interest rates, gender, age, the guaranteed period and possible future increases.

Benefits of an annuity

• An annuity guarantees the annuitant a steady income flow for the rest of their life.

• An annuity is beneficial to you since it’s the only investment that you can’t outlive because its payable for your whole life time.

• Monthly annuity payments are tax exempt; hence annuitant enjoy immense tax benefits for up to 25,000.

Surrender period and withdrawals

Annuities normally have surrender period, in this time annuitants cannot make any withdrawals. This period may span for several years, without paying a surrender charge or fee.

Investors must consider their financial requirements during this time period. For instance, if there is a major event that requires a significant amount of cash such as a wedding, then it’s advisable to evaluate whether the investor can afford to make requisite annuity payments.

Most insurance companies allow their recipients to withdraw up to 10% of their account value without paying a surrender fee, however, if one withdraws more than that, they may end up paying a penalty, even if the surrender period has already lapsed. There are also tax implications for withdrawals before age 59.5.

ANNUITY CRITICISM

One criticism of annuities is that they are illiquid. In that case, insurance companies typically lock up your deposits into annuity contracts for an extended period, known as the surrender period. You are going to incur a penalty if you decides to withdraw part or all the money.

These periods can last anywhere from two to more than 10 years, depending on the particular product. Surrender fees can start out at 10% or more and the penalty typically declines annually over the surrender period.

The second criticism is that annuities are complex and costly. At times, individuals may buy an annuity without clearly knowing how they work or the costs involved. Be sure to do your research to understand all fees, charges, expenses, and potential penalties.

Annuities vs. Life Insurance

There are two types of financial institutions offering annuity products. These are Life insurance companies and investment companies.

For life insurance companies, annuities are a natural hedge for their insurance products. Life insurance helps you as an individual to deal with mortality risk, which is the risk of dying prematurely. Policyholders pay an annual premium to the insurance company that will pay out a lump sum upon their death.

If the policyholder dies prematurely, the insurer pays out the death benefit at a net loss to the company. Actuarial science and claims experience allow these insurance companies to price their policies so that on average insurance purchasers will live long enough so that the insurer earns a profit.

Annuities, on the other hand, deal with longevity risk, or the risk of outliving one’s assets. The risk to the issuer of the annuity is that annuity holders will survive to outlive their initial investment.

Annuity issuers may hedge longevity risk by selling annuities to customers with a higher risk of premature death.