Question

Your client John Smith is 45. He wants to retire at the age of 55. He plans to sell his business sometime in the next five years and he is considering using the $100,000 proceeds from the sale to purchase an annuity.

1. Explain to your client what an annuity does.
2. Under what set of circumstances would the annuity be desirable to Smith?
3. If the annuity is purchased, what features should it have with respect to guarantees?
4. If Mr. Smith does not decide to purchase and annuity, what alternative uses of the $100,000 could provide him with life income in retirement?

Answer 1

a. Explain to your client what an annuity does.

Annuity is a long term insurance contract that is issued by insurance company, in which you either use to pay a fixed amount or year wise payment to get a steady stream of income or full amount after retirment. The type of annuity & the details of particular annuity can determine the payout you will recieve.

b. Under what set of circumstances would the annuity be desirable to Smith?

if Mr. smith has no regular source of income post retirement then to meet out his monthely expenses he need to create a source of income, in such circumstances annuity is usefull for Mr. smith to live life on their own terms & with a regular stream of income throughtout his life with options to meet different needs.

c. If the annuity is purchased, what features should it have with respect to guarantees?

There are three types of annuities - Fixed, Variable, Indexed. a fixed annuity guarantees a minmum rate of interest on your money as well as fixed a fixed number of payment from insurance company. On the other hand variable annuity gives you option to invest in mutual fund & other securities, here returns depends upon how well your investment performs while indexed annuity use to follow stock market index returns, so it has a features of both fixed & variable returns all three type heve option to pay a lumpsum of a defeered paymet till the retirement after that you will recieve regular income based on your plan. apart of return guartee annuity use to give tax benifit on your current income, you use to pay annuity befor paying tax & till its maturity when you start recieving payment no need to pay any tax on it.variable annuity use to give death benifit, if you dies befor paying your all the deferred part your nominaee will get death beifits.

d. If Mr. Smith does not decide to purchase and annuity, what alternative uses of the $100,000 could provide him with life income in retirement?

he can diversify his investment by putting some part in each of the fixed, variable & indexed annuity & apart of this he has diffent options to invest in retirement fixed income funds,laddered bond & balance funds. in this way he can divesify his investment & create a source of regular income with different benifits option.

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