The real money maker for insurance companies comes from investing free cash. Most insurance companies have a diversified portfolio of fixed income and equities.
Maybe someone can provide a more accurate number but from my back of the envelope calcs, the insurance company would need to earn maybe 5.4 % or so per year to break even. More than that is ...
Why would a life insurance company agree to pay out a nominal amount that is higher than the principal given to them?
As mentioned in other answers, the insurance company is assuming that they will earn a return on the principal they receive from the annuitant which is greater than they are giving the annuitant.
The basic principle behind this is called ...
The insurance company is expecting to earn more money investing the initial buy in amount ($100k) than it pays out. You need to calculate what the equivalent rate of return is for that $100k. Unless this is also an immediate annuity there is typically a period of time before any payout begins.
There are more criteria for an annuity than you’ve included to ...
Investing like professionals
They are investing the money like a university endowment. When investing money for a very long time, there's a "gold standard" for how to go about it. The rule of thumb is that you expect 4-7% a year growth beyond inflation. Let's assume 6% growth and 2% inflation, or 8%, which is quite in line with how endowments are managed. ...
The companies providing the annuities will end up losing money on all their existing annuity obligations.
There are different kinds of annuities: Fixed, Variable, and a many varieties of Structured Index products, etc.
While I can't say that it's true for every Structured Index product, in general, the insurance company has zero risk and collects their fee ...
The company calculates it will make more than the 2.3778% 5.12% annual return it's paying out. That doesn't seem particularly high even these days and might have been very low when the paper you're reading was written.
And it's certainly a much lower rate than almost any other way of getting working capital would cost ;-)
Sorry, was late. The correct ...
Annuities are complex products and therefore the description in the prospectus is complex. I'd question whether some of the indexed annuities are a good investment but I don't think that the problem is that the description isn't "honestly written" (they're regulated).
I don't think that you can make a direct comparison of annuities with term insurance ...
I want to have an annuity that provides a steady return and that my kids can inherit.
What annuity will come close in simplicity to "Term Life insurance", some inflation protection, is tax efficient and is protected from the issuer going bankrupt?
A fixed deferred annuity typically offers a stable return and is among the simplest of annuities. It may be ...
Thanks to @D Stanley for the hint
| |deposits |principals** |interest rate |interest*|accumulated interest |
|2nd half 2010 |100 |100 ...
You have to consider that a dollar today is worth more than a dollar in the future.
For your example, the company is willing to sell $159,360 spread out over 20 years, in exchange for $100,000 now, it's because they have determined that they can expect a return from that $100K that exceeds the extra $59,360 that have to pay out over time.
In their ...
The only reason you can calculate the PV of perpetual payments is because of the discount rate; although you have an infinite number of payments, the present value of each payment is decreasing, leading to the values summing to a finite total. If you have growing payments, then if the growth exceeds the discount rate, then overall the present value of each ...
It's not clear in the first example if a payment is also made daily or if just the interest is compounded daily. For the simple case, lets assume that they are the same.
The formula for the payment amount for a loan is:
PV * r
in your example, n=5*365 (5 years), r is 2.8%/365 = 0.000077, and PV is 18,500. So the result is:
I use GNU Octave for problems like these:
A = 1000
N = 10
B = 200
k = 1.0800
octave:5> A*k^N + sum(B*k.^[1:N])
ans = 5288.0
Here I invested 1000 EUR for 10 years at rate of 8% = 0.08, and 200 EUR every year for 10 years at the same rate. At this rate, it will be 5288.0 EUR....
Using a formula for the final value of the compounding deposits
i = 0.07
d = 100
n = 6
r = (1 + i/4)^2 - 1 = 0.0353063
a1 = (d (1 + r) ((1 + r)^n - 1))/r = 678.663
i = 0.05
d = 200
n = 2
r = (1 + i/4)^2 - 1 = 0.0251562
a2 = (d (1 + r) ((1 + r)^n - 1))/r + a1 (1 + r)^n = 1128.46
i = 0.06
d = 200
x = 2000
n = 9
r = (1 + i/4)^2 - 1 = 0.030225
a3 = (d (1 + ...
every additional month I hold it for earns me less and less interest
(as a percentage of my original investment), meaning each period of
time spent holding it is less profitable.
Well, this is the fallacy. Say I lend someone $10,000. And the deal is to pay 1% interest each month along with $100 in principle. This would make the math simple, as each ...
It's probably small solace but traditional variable annuities tend to have an annual no penalty withdrawal limit equal to the GRIP, GRUB, GMIB (deferred growth feature) or whatever any particular insurance company calls it. It tends to be in the area of 5-6%. Any such withdrawal is LIFO so the withdrawals are taxable until all gains are exhausted.