Insurance and annuities

Insurance

An insurance is a contract that grants financial protection to an individual. An insurance contract (represented by a policy) protects in case of financial loses, that may result from damage in properties, liability or injuries caused by a third party.

There are various types of insurances. The most popular are: auto insurance, health insurance, homeowner’s insurance and life insurance. Car insurance, for instance, is compulsory by law.

Furthermore, the law obliged different business owners or professionals to have a certain type of insurance: doctors usually pay for a malpractice insurance, restaurant owners pay insurance to cover the eventual accidents or injuries that may occur in the kitchen, etc.

Insurance Policy Components

Every policy comprises of three components: premium, policy limit and deductible. Take your time to understand each of these terms before choosing the right insurance for you, to maximize the benefits.

The premium represents the price – meaning the monthly amount you pay, to benefit the insurance. This amount is determined by the insurer, following a strong analysis that considers the business risk profile. Say you want to close an auto policy. The insurer will set the amount judging by your driving history. The costs can vary, depending on how skilled you are, your experience and your history with accidents.

Consider that every insurer has a different pricing policy, so try and find the best for you.

The policy limit is the maximum amount an insurer will pay under a policy for a covered loss. It can refer to a maximum per period, per loss or injury or over the life of the policy (lifetime maximum). The policy limits and the premiums are proportional: the higher the first, the higher the latter.

The deductible is a specific amount that the policy holder needs to pay in order to benefit from a claim. The deductible can be regarded as an instrument to filter large volumes of insignificant claims. It can be applied per-policy or per-claim.

Annuities

An annuity is an insurance contract, issued by an insurance or investment company. This type of contract comprises of two phases: an accumulation phase and a distribution phase.

In the first part, the accumulation phase, the contract owner makes payments into the contract, expecting a stream of payments at a later point in time. In other words, in this period, the annuity is being funded. As a plus, these amounts are not subject to income taxes until they are withdrawn, which allows tax-deferred growth of the investment. Upon annuitization, payments commence. This is called the distribution phase. The accumulated value of the annuity contract can result into a lifetime guaranteed income or for a set period.

These features make annuities a key part of most of retirement strategies. However, this does not work for everyone.

On the other hand, some found in annuities a way to turn a substantial lump sum into a steady cash flow.

Types of annuities

There are two types of annuities: fixed annuities and variable annuities. Fixed annuities will provide a regular periodic payment to the annuitant, while the variable ones consider the investment’s performance: if the investments of the annuity fund are performing, chances are for higher income. If not, the annuitant is paid accordingly.

Take your time and consult with a Financier advisor to see which type of annuity suits you best.