New answers tagged annuity
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The word "annuity" basically means "fancy loan". Instead of the bank loaning you money, and then you have to pay back the principal plus interest, with an annuity you loan money to the bank (or whoever's selling the annuity), and then the bank pays the principal back to you, plus interest. It's the same basic principle as a savings account, Certificate of ...
0
As several people already indicated, the difference in value can mainly be explained by the expected return on investment of the company giving out the annuity. However, also keep this in mind:
The world is not a mathematical model
There may be nasty little details in that impact the expected value. The expected payout should still be higher than what you ...
-1
It's this simple:
All of these answers which have used mathematical formulae are essentially part of the problem - people fail to understand how simple it really is.
In the first month they've given you $664. You've given them $100,000.
Now stop and think about that for a good few minutes and you should be able to work out the rest.
If you're still ...
4
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. ...
20
Why would a life insurance company agree to pay out a nominal amount that is higher than the principle 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 ...
-1
(Edit: since OP doesn't specify the type of annuity, so there is a lot of confusion)
Just factor in the opportunity cost paid for the premium and you will get the idea behind the annuity. There are many types of annuities. Depends on the type of annuities, an insurance company can always find a way to make a cut from the premium paid. However, OP didn't ...
2
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 ...
-3
In addition to what the other users have said regarding the difference between the market rate of return and the return they actually promise you, there is also the lifetime of the policy itself.
Most whole-life policies are not actually kept for the policy-holder's whole life. I do not know what the statistics are now, but my father, who worked for a ...
50
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 ...
3
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 ;-)
Edit
Sorry, was late. The correct ...
20
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 ...
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