Short notes on Net Single Premium in Annuities

Short notes on Net Single Premium in Annuities

An annuity may be defined as a contract whereby for a cash consideration, (called premium) one party (the insurer) agrees to pay the other (the annuitant) a stipulated sum (the annuity), throughout life, or during the life within a fixed term, either annually, semiannually quarterly or monthly.

The purpose of the annuity is to protect a hazard-the outliving of one’s income. It is just opposite of insurance contract. The annuity protects against the absence of income in old age. A periodical amount is given by the insurance to the insured up to his life or up to a fixed period life thereafter.

Under this annuity the payment of annuity starts from the date of first annuity period. For example, if annuity is to be paid six monthly and contract of annuity, i.e., payment of purchase price is made on 1st Jan., 1976, the first annuity will be paid on 1st June, 1976.

Therefore, up to this period, the insurer can enjoy the premium paid six months ago. If he survives to next period of installment, the insurer has to pay the second installment of annuity. The immediate annuity may be (1) Life Annuity, and (2) Term Annuity.

(1) Net Single Premium in Life Annuity:

In this case, the payment of annuity shall continue up to the life of the annuitant. No annuities are paid after his death nor is any part of the consideration refunded to his beneficiaries. The cost of annuity depends upon his survival; therefore, the calculation is based upon the probability of survival.

(2) Net Single Premium for Temporary (Term) Annuity:

The process of calculation is the same as discussed above with only difference that the calculation continues only up to a fixed period. It does not, like annuity, continue up to the completion of Annuity Mortality Table. For example, an annuity of Rs. 1,000 to be paid annually is taken at the age of 70 and continues up to 5 years.