What Estate Planners Need to Know

Compass points to

Compass points to “INSURANCE”

Annuities and perpetuities are insurance products that are paid on a fixed schedule. An annuity pays these benefits over a period of time and then ends. An Eternity makes these payments indefinitely. Here’s what you need to know about these insurance products.

Wealth planning can be complex, in part because your goals and circumstances may change as you approach retirement. That’s where a financial advisor can be a valuable partner in the process.

What is an annuity?

An annuity is a financial product that pays out to the holder regularly over a period of time. For example, an annuity can be set up to make payments over 20 years or for the lifetime of the asset holder. The annuity pays these payments on a set schedule until the term expires, after which the annuity ends.

These are fairly common retirement products sold by insurance companies. A retirement annuity is generally built around the life of the holder. You buy the contract earlier in life, after which the annuity is written to make payments that begin when you retire and end when you pass away. The amount of those benefits is based on how much you paid for the annuity and how long before retirement you bought it. (The sooner you buy an annuity, the more it’s generally worth.)

Annuities are named because they make regular payments throughout the year. They are built around an annual plan. The payments of an annuity can be variable or fixed, depending on the nature of the contract, but the schedule is fixed.

This is a specific form of financial contract. You can take out an annuity with various forms of underlying capital, but not every periodic payment agreement is an annuity. For example, a bond also issues payments on a set schedule. However, it is not an annuity as bonds are written as debt contracts rather than insurance contracts.

Annuity contracts are usually sold in exchange for a fixed amount or installment payments up front. The idea behind most of these products is that the buyer spends less on the annuity than they ultimately receive in payments, while the seller benefits by using the purchase price upfront and investing it before the annuity payments begin.

What is Eternity?

Man calculating annuity returns

Man calculating annuity returns

A perpetuity is a form of annuity. Like an annuity, a perpetual pays periodic payments on a set, annual schedule. Like an annuity, the amount of the payment can vary in perpetuity. However, a perpetuity does not have an expiration date or expiration date. As long as the underlying asset exists, a perpetual asset will continue to make payments indefinitely (or “perpetually”). This is in contrast to an annuity, which has a predetermined end date for the benefits.

For example, an insurer may issue a perpetual contract. This contract would make regular payments to the contract holder every six months. It would continue to make these payments as long as the insurance company exists. If someone who has the contract dies, their heirs inherit the contract and collect the payments.

True eternities are extremely rare. Very few institutions will issue assets designed to make guaranteed, perpetual payments. Instead, almost all assets have fixed due dates (such as annuities) or discretionary payments (such as almost all forms of equity). This writer is unaware of any real eternity on the market at the time of writing.

It comes down to

Handshake over an annuity purchase

Handshake over an annuity purchase

An annuity is a financial asset, not an investment security, that is paid at regular intervals over time. It is always built around an expiration date, whether that be a certain number of years or the life of the contract holder. A perpetuity is a form of annuity. It also issues regular payments to the contract holder, but it does not expire. It continues to make perpetual payments.

Wealth planning tips

  • Consider working with a financial advisor while doing estate planning. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • It is important to have a good estimate of how your preparation for retirement is going. Use our free retirement calculator to assess your progress.

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