An annuity is a periodical level payment made in exchange at the purchase money for the remainder of the life time of a person or for a specified period. The recipient is usually as an annuitant.
In annuity contract, the insurer undertakes to pay certain level sums periodically up to death or expiry of the term. Since at the early death, the insurer does not suffer loss, no medical examination is necessary. However, evidence of age is essential at the time of proposal.
The annuity is beneficial to those who do not want to leave amount for others but want to use their money during their life-time. During the life-time, they may make maximum use of the money by purchasing annuity which is not possible otherwise.
In bank, he may leave certain amount at early, death or may suffer loss in living long due to stoppage of the money after a certain period. The payment of annuity generally continues up to the life.
So the premium rate is determined according to longevity. The amount premium is higher at younger age and lower at advanced age.
Annuity contract is just opposite of the insurance contract.
(i) The annuity contract liquidates gradually the accumulated funds whereas the life insurance contract provides gradual accumulation of funds.
(ii) The annuity contract is taken for one’s own benefit but the life assurance is generally for benefits of the dependents.
(iii) In annuity contract generally the payment stops at death whereas in life insurance the payment is usually given at death.
(iv) The premium in annuity contract is calculated on the basis of longevity of the annuitant but the premium in life insurance is based on the mortality of the policy-holder.
(v) Annuity is protection against living too long whereas the life insurance contract is protection against living too short.
Both of these contracts complete the economic programme of an individual from beginning to an end. When life insurance stops to serve the annuity contract starts to help the individual up to his survival.