What is Annuity?

Retirement planning is a crucial aspect of every individual’s life, as they strive to secure financial independence in the later years. An annuity helps individuals strategize to fund their retirement expenses. It serves as a mechanism to secure a stable income stream in the future, particularly during retirement.

An annuity insurance constitutes a contractual agreement between an individual and an insurance company, designed to yield a consistent income throughout retirement. In this arrangement, the individual provides a lump sum payment, which the insurance company then invests to generate returns.


How does Annuity Insurance work?

Before venturing into an annuity plan, it’s imperative to understand how it works. There are generally two phases.

  1. Accumulation phase: During this phase, individuals pay premiums or make lump-sum contributions to the insurance company tailored to their objectives and financial needs. These contributions accumulate with interest over time.
  2. Distribution Phase: Once the individual reaches retirement age or chooses to start receiving payments, the insurance company starts making periodic payments to the individual. These payments can be structured in various ways, such as monthly, quarterly, or annually, and can continue for the rest of the individual’s life or for a fixed period. An individual can opt for a guaranteed payout model (fixed annuity) or one pegged to the performance of underlying investments (variable annuity).

Types of Annuities

Several types of annuities are available, including:

  1. Deferred Annuity: The premium can be paid periodically until retirement age, or it can be paid as a lump sum. The payments from the insurance company will be issued in the future at a time agreed upon with the customer.
  2. Immediate Annuity: Payments commence immediately after the purchase of the annuity, making it ideal for individuals on the brink of retirement or those who have already retired.
  3. Fixed Annuity: Renowned for its stability, fixed annuities ensure constant payment throughout the agreed tenure. It is considered a conservative option, with the money being invested into fixed income instruments mostly.
  4. Variable Annuity: This type of annuity has variations in the payments between one instance to the next. The variations in payments are linked to the performance of the benchmark to which the underlying investment is mapped.

In Kenya, annuity insurance may have tax benefits or other incentives to encourage individuals to save for retirement. It’s important for individuals to carefully consider their financial goals and needs before purchasing an annuity, as the terms and conditions can vary between insurance companies and products.

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