Why buy annuities

2007-03-08 10:33:40

( Financial )



Why do people buy annuities? If you don't have one yet, why should you soon include annuity payment in your budget?

What really is an annuity? The term is used to refer to two types of legal contracts, with the first type reflecting the traditional definition. The first is known as immediate annuity. This type requires someone to make a series of payments for a fixed number of years or for a lifetime. The price is either at level or may be fluctuating. The purpose of immediate annuity is to distribute savings like in pensions. The second type is called deferred annuity. The purpose of deferred annuity is to accumulate savings. The returns of a deferred annuity is based on interest rate earnings while immediate annuity may be fixed depending on the contract. This means that a deferred annuity may have returns that are either above or below the potential return presented by companies engaged in annuity marketing. And so, people may buy annuities depending on how much returns they want.

Most people who buy annuities are concerned about their "retired" years, when they are physically incapable to work for their daily needs. Retirees in reality, face different expenditures, most common of which are their medical expenses. People who have annuities may encounter less financial woes. This is why most annuity selling sales pitches focus on people's potential problems during old age if needed preparations are ignored. Annuity agents may start by asking buyers what kind of life they want when they retire. Do they want a lot of recreation? If yes, then what type? Do they want a life with less health woes? Do they want their remaining time on this world to be worry-free? Before you know it, a person is already handing in his/her first annuity payment. All of us want some measure of control and it seems that annuities give us just that.

But a person's decision to buy annuities may depend on several factors. The first is the availability of funds during a person's working years. If, for example, a person is pressured by a lot of needs during these years, then the person, despite understanding the benefits of annuities, may have the purchase of an annuity take a backseat. Another factor is the bequest motive of a person. If a person intends to leave most of his/her savings to the next generation, instead of buying annuities, he/she will choose to put it in a bank and sacrifice personal future convenience. One last factor is the price of the annuity. Because most annuities are for use in old age, people who contemplate on buying one are usually in their midlife when prices are already high. If the annuity contract becomes too high, the person may rule out purchasing one for his future.

Despite these factors, the benefits of an annuity make it a wise buy. So if you want to leave this world with a bang in terms lifestyle, then buy annuities.


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