Question

In no than less than 200 words, explain how an annuity differs from life insurance and describe the major characteristics of a fixed annuity.

Answer 1

Annuity differs from life insurance in many ways. Annuity is a series of fixed payment that is paid for a lumpsum investment at the beginning of the period. Annuity is more of a retirement-oriented product where people look for ways to make sure that they continue to receive a certain amount of income. Life insurance on the other hand is an insurance policy which insures in the event when there is loss of life. So, if you have taken a life insurance and you die within the stipulated period of natural causes then your family will be paid a lumpsum amount. In annuity a series of cash flow is paid, it is not concerned with the happening of an event. In annuity the cash flow is paid for a certain period of time as agreed while purchasing the annuity product on the other hand the payment of life insurance happens on the event of death or it might not happen if the event did not occur. For insurance you have to pay a premium either each month or each year and then at the end if the event occurs the lumpsum payment is made whereas in the case of annuity usually a fixed investment is made and that investment pays a certain amount of money each period. Annuity is more a way to continue to receive a fixed income in the absence of a job where as the life insurance is more an approach to compensate for the loss of live which caused in loss of income.