Immediate Annuities and Their Advantages

The form of annuity most commonly used is the so-called "ordinary life" or "immediate" annuity. This is purchased with a single cash sum in advance and guarantees the payment of a stipulated sum, annually, semi-annually or quarterly during the lifetime of the annuitant, with the understanding that upon his death such payments shall cease and the consideration paid for the annuity be regarded as fully earned. Owing to the greater longevity of female annuitants the cost of annuities for women is slightly higher than for men. Annuities of this kind prove serviceable to that considerable class of, men and women whose only means of support is an estate so small as to yield an altogether inadequate income, and who have no one to whom they care to transfer this estate in the event of death. For purposes of illustration let us assume that a man aged 65 possesses $15,000 and that this fund constitutes his sole means of support. If invested in the most careful manner, let us say in gilt-edged bonds, so as to avoid any danger of loss, the current rate of return will probably not exceed four percent, thus limiting the owner's income to $600 a year. This amount may prove woefully inadequate for proper support during old age; yet the owner, not knowing how long he may live, does not feel that he can afford to take a portion of his principal each year for living expenses, because impairment of the principal means a corresponding reduction in the income. As previously stated, the danger confronting this man is just the opposite of that facing the man who wants insurance against death. The latter wants insurance because he does not know how long he may live, while the former is confronted with the danger of living too long, i.e. of outliving his income".

The difficulty referred to can, however, be remedied by reinvesting the $15,000 in a life annuity. By doing this a definite and much larger income, guaranteed for the whole of life, can be obtained. In the event of early death, it is true, the purchase price of the annuity will not be returned, but the necessity for an income will have ceased. On the contrary, in case of long life the return will not only be absolutely certain and regular from year to year but also very remunerative. To quote the rates of a certain company, our owner of the $15,000 fund may use the same as a cash payment for an annuity at age 65 which will yield him an income throughout life of $1,538.10, instead of $600, per annum, or 10.4 percent, as compared with the current rate of 4 percent. As the age of the annuitant when purchasing the annuity increases, the greater will be the return, amounting in this company to nearly 12½ percent, at age 70 and to nearly 15½ percent, at age 75, the last return being nearly four times that secured at the current rate of 4 percent. At the same ages the corresponding returns of an annuity in this company on the life of a woman will be 9% percent., 11% percent., and 13½ percent. Should the annuitant desire a definite income such as $100, $500, $1,000, or any other round amount, the companies will issue the annuity on that basis. Thus if a man aged 65 desires an annuity of $1,500, he is permitted to deposit the necessary capital with the company whose rates are being used for illustrative purposes, viz, $14,628. These large returns on annuities issued at the later years of life are possible (1) because the death rate following ages 65, 70, or 75 is very high and (2) because, in accordance with the meaning of an annuity, all payments will cease upon death and the unused portion of the purchase price of the annuity will redound to the benefit of those annuitants still living. As will be explained later, the rates for annuities are computed in the same manner as are those for insurance policies, and annuity benefits may, therefore, be granted by the company with equal certainty.

With reference to the classes of persons to whom an annuity may appeal should be mentioned unmarried men and women who will leave no dependents and who desire to make the best provision for their own comfort during life, widows or widowers without children, parents whose children are comfortably provided for, and employers who may wish to provide adequately for old and deserving servants. For persons in these classes an annuity furnishes a definite life income which is free from the care and danger of loss attaching to the ordinary methods of investing money. The arrangement, however, does not as a rule appeal to those who have children, especially if they are in need of support or if it is desired to leave them an inheritance, because the only benefit derived from an annuity is the income return during life.