Understanding Insurance and Annuities

What is insurance?

In terms of law and economics, insurance is a form of risk management mainly used to hedge against risk of contingent loss. Insurance can be thought of as a guaranteed small loss to prevent a large, possibly devastating loss and is also known as the equitable transfer of the risk of loss from one entity to another in exchange for a premium.

The individuals involved include an insurer which is usually a company selling the insurance and the insured who is the person or entity purchasing the insurance. The insurance rate is an instrument used to pinpoint the amount, known as the premium, to be charged for a certain amount of insurance coverage. The practice of appraising and controlling risk or risk management has developed as a distinct field of study and practice.

What is annuity?

One of the many types of financial investment sold by insurance companies is an annuity. One good thing about annuities is that it is tax-deferred wherein one does not need to pay taxes until such time when payouts start to be received. Not paying taxes will allow your annuity to grow quickly. A payout is guaranteed by annuity contracts within a chosen period of time.

The two phases of annuities are accumulative and distributive. In the accumulation phase, you are still accumulating or have already deposited money into your annuity and it is invested. The earnings are growing but are not being taxed. The distribution phase is reached when you prefer to start receiving your payouts. The manner of payout can be a lump sum payout or annuitized, meaning you prefer to receive on a monthly basis over a certain period or for life. Once you start receiving money for annuity, it gets taxed as an income in general.