Annuity

An annuity is an insurance contract that pays out a stream of income, often for life, in exchange for a lump sum or series of premiums paid in.

A policyholder hands premium to an insurer, which invests it and later returns it as scheduled payments—monthly income in retirement, a lump sum at a set date, or a payout tied to how an underlying investment performs. The insurer is the party bearing the risk that the policyholder outlives their savings, since a lifetime annuity keeps paying no matter how long the holder lives.

Annuities exist to convert savings into guaranteed income, which is a different job from life insurance's job of protecting dependents against an early death. The hard part is structure: fixed, variable and indexed annuities split up how much investment risk and upside the policyholder keeps versus hands to the insurer, and riders for guaranteed withdrawals or death benefits add further layers that are easy for a buyer to misread as simple savings products.

In insurance technology, annuities are notoriously paper-heavy and slow to issue and service compared with other product lines, so vendors build platforms around illustration and quoting, e-application and straight-through processing, and administration systems that let advisors and carriers move sales and in-force business off manual, form-based workflows.

Written by Insurtech Daily.