Guide to Annuity: Meaning, Benefits and Types

Guide to Annuity: Meaning, Benefits and Types

What is an Annuity?

Annuity is a contract between an individual called an annuitant (policyholder) and an insurance company. The annuitant deposits a sum of money either by lump sum or in payments over time, with a promise by the insurer to pay him at an agreed frequency (e.g. monthly, quarterly) typically for the rest of the annuitant’s life. However, payment ceases (except for the guaranteed annuity) in the event of death of the annuitant.

How Annuities Work

Annuities are generally the best option for individuals seeking for a retirement income that is guaranteed. They are designed to grow savings and guarantee the annuitant steady cashflow while he or she remains alive. Earnings within the annuity are tax free until withdrawal. Income tax may apply to withdrawals, and early withdrawals made before a specific age may incur penalties.

Features of Annuity
  • The minimum entry age is 50 years while the maximum age of cover is 70 years.
  • The premium depends on the purchase price.
  • Commission is 0%-3%.
  • The sum assured is dependent on the purchase price.
  • Earnings in annuities are tax-free until withdrawal, potentially allowing for greater accumulation over time.

Annuity offers several benefits, including:

  1. Steady Income: Annuities provide a regular stream of income, which can be crucial for retirees seeking financial stability.
  1. Risk Transfer: Risks associated with availability of future income in retirement are transferred to the insurer.
  1. Collateral: Policy can be tendered as a collateral.
  1. Lifetime Income Option: Some annuities offer a guaranteed income for life, helping to ease the risk of outliving one’s savings.
  1. Death Benefit (if applicable): Some annuities come with death benefits, ensuring that if the annuitant dies before receiving the full value of the annuity, the remaining amount goes to named beneficiaries.
Types of Annuities
  • Flat Annuity with No Guarantee: Under this annuity type, the structured payment is made to the annuitant as long as he lives, and payment ceases once the annuitant dies. (It has no guaranteed term within the payout period).

  • Flat Annuity with 5 Years Guaranteed: Under this annuity type, the structured payment is made to the client for a guaranteed period of 5 years regardless of whether he lives or not. If the annuitant dies before the end of the fifth year, the present value of the payment yet to be made to him becomes payable to his named beneficiary or next of kin. While if the annuitant lives beyond the fifth year, he will continue to receive his structured payment for life which will cease upon the death of the annuitant.

  • Flat Annuity with 10 Years Guaranteed: The structured payment is made to the client for a guaranteed period of 10 years regardless of whether he lives or not. If the annuitant dies before the end of the tenth year, the present value of the payments yet to be made to him becomes payable to his named beneficiary or next of kin. However, if the annuitant lives beyond the tenth year, he will continue to receive his structured payments for life which will cease once he passes away (This is currently available in the Cornerstone product bouquet).
How to Buy Annuity

Individuals can buy an Annuity by making either a single payment or a series of payments. The following are steps to purchase an annuity.

  1. Research Types of Annuities: Understand the various types of annuities and choose one that fits your needs-
  1. Compare Providers: Explore and compare different insurance companies that offer annuities. Consider their reputation, financial stability, claims payment, and customer reviews.
  1. Request Quotes: Contact the insurance company or financial planners to get quotes based on your chosen annuity type and features. Compare costs, fees, and potential returns.
  1. Complete Application and Undergo Approval: Once you’ve selected a provider and annuity, complete the basic online form.
  1. Fund the Annuity: Transfer the funds you intend to invest in the annuity to the insurance company. For Cornerstone Insurance, you can make a lump sum deposit of the annuity purchase amount into our Union Bank Account. Account Name: Cornerstone Insurance Plc – Annuity Account. Account Number: 0045243410.
  1. Payment Confirmation and Policy Contract: Once payment is approved, you’ll receive confirmation of your annuity purchase along with the policy document. Review these documents carefully and keep them for record purposes.
Documents Required to Enroll for Annuity
  1. Proposal form
  2. Statement of account from your Pension Fund Administrator (PFA) – ensure it’s not more than one month old.
  3. Retirement letter from employer.
  4. Bank Verification Number (BVN)
  5. Valid means of identification (NIN, Voters Card, Driver’s License, or International Passport).
  6. Passport photograph of annuitant and one passport photograph for each of the beneficiaries.
  7. Utility Bill (within the last six months); utility bill can be telephone bill, waste bill, electricity bill, tenancy agreement or bank account statement.

Annuity is a great investment policy that grows tax-deferred—which means you don’t pay taxes until you withdraw your funds—helping you cater for your needs at retirement. However, before buying an annuity, make sure you carefully review policy details, coverage limits, and exclusions. Keep in mind that your insurance needs can vary, so it’s important to choose plans that align with your situation and financial goals.

To learn more about our Annuity offerings:

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How Much Does It Cost to Buy an Annuity?

The cost of buying an annuity varies based on factors like the type of annuity, the features selected, the chosen payout options, and the insurance company issuing the annuity.

Who Sells Annuity?

Annuities can be purchased through insurance agents, financial planners, banks, and life insurance firms. However, only insurance companies can issue policies.

Is Annuity a Good Investment?

Yes, annuity is a good investment because it provides a reliable income stream in retirement giving you peace of mind. Additionally, in a situation where the annuitant dies before the end of the designated period, the beneficiaries will still get the outstanding benefit of the annuitants because of the assured duration of ten years.

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