Overview
The word annuity derives from the Latin word annus (= a year) and literally means annual payments. In its basic form, it is an investment that provides a defined series of payments in the future in exchange for an up-front sum of money.
When you purchase an annuity from an insurance company, the insurance company will commit to pay an income for a specified period of time. Whether the income payments start right away, or at a future date, is determined by the type of annuity that is chosen. Accordingly, the two main types are immediate annuity and deferred annuity.
A deferred annuity can either be variable or fixed. The term fixed means that the life insurance company guarantees the principal and a certain definite return on the investment, whereas in a variable annuity the value of the insurance policy depends on underlying investments, which typically consist of a portfolio of funds, stocks and bonds, but in specially structured insurance contracts may also include other assets, including unquoted shares of private businesses and real estate.
A further distinction is made between simple life and joint/survivorship annuities. A simple life annuity provides benefits until a person dies, even if the death is premature. Such annuities are very rarely asked for as there is no final lump sum payment and no provision to pay benefits to a spouse or other survivor. The more common joint/survivorship annuity pay benefits to the annuitants during the period of their joint lives, with the annuity to continue to the survivor when the first annuitant dies.
A Swiss annuity or Swiss life insurance contract generally involves four parties: The insurance company, which issues the policy and provides coverage to the policyholder in return for payment of the insurance premium. The insured person is the one whose life the insurance covers. The beneficiaries are those persons who are designated by the policyholder to receive the specified capital from the insurer at either a specified date in the future or in case of the insured person’s death, depending on the type of insurance contract. Furthermore, annuities and life insurance are often arranged through an insurance broker who advises the insured person and policyholder and liaises between the contractual parties.
Immediate annuity
With an immediate annuity income payments start immediately or within one year of purchasing the annuity. You choose whether you want the income guaranteed for a specific number of years or for your (or another person’s) lifetime. The insurance company will then calculate, based on the amount you purchase and the life expectancy of the insured person, the sum of each income payment.
Deferred annuity
A deferred annuity is a type of annuity contract that delays payments of income, installments or a lump sum until such time as the investor elects to receive them. This type of annuity has two main phases, the savings phase in which you invest money into the account, and the income phase in which the plan is converted into an annuity and payments are received.
A deferred annuity can either be fixed or variable
Fixed and variable annuities
Annuities and those life insurance policies which have an investment component (for example endowment policies) can be divided into fixed and variable products. The term fixed means that the life insurance company guarantees the principal and a certain definite return on the investment, whereas in a variable annuity or life insurance contract the value of the insurance policy depends on the underlying investments which can be chosen more or less freely by the policyholder. Such underlying investments typically consist of a portfolio of funds, stocks and bonds. In specially structured insurance contracts (“insurance wrappers”, “portfolio bonds”) it may also include other assets, including unquoted shares of private businesses and even real estate.
Parties involved in a Swiss annuity/life insurance contract
A Swiss annuity or life insurance contract generally involves the following four parties:
The insurer (i.e. the Swiss insurance company) issues the policy and provides coverage in return for payment of either a lump sum or regular payments, or a combination thereof.
The policyholder enters into a contract with the insurer and receives coverage for him/herself and/or other persons (beneficiaries). A legal entity such as a company or foundation, but also a trust, can be the policyholder. This is confirmed in the insurance policy, a document issued by the insurer. As the contracting partner, the policyholder owes the insurance premiums that need to be paid to the insurer in return for providing insurance coverage.
The insured person is the one whose life the insurance covers. This can but need not be the same person as the policyholder, but it must be a natural person. However, legal entities (companies, foundations, etc.) may be beneficiaries and policyholders.
The beneficiary or beneficiaries are those persons who are designated by the policyholder to receive the specified capital or the annuity payments from the insurer at either a specified date in the future or in case of the insured person’s death, depending on the type of insurance contract. Also the beneficiary can be a legal entity or a trust and must not necessarily be a natural person.
Swiss annuities and life insurance are normally arranged through an insurance broker who advises the insured person and policyholder and liaises between the contractual parties. Brokers are remunerated with a commission paid by the insurance company. In most countries, insurance brokers must be licensed to carry on their business, and in Switzerland this is the case as of 2006.
How are annuities different from life insurance?
Both annuities and life insurance should be considered in any long-term financial plan. While both include death benefits, you buy life insurance in the event you die too soon and an annuity in case you live too long. In other words, life insurance provides economic protection to beneficiaries such as your family if you die before your financial obligations to them are met, while annuities guard against outliving your assets and help to protect them.
Annuities and life insurance: An overview of types and forms
The world of annuities and life insurance is made up of many different products, providers, costs and terminology that can sometimes confuse even professionals. It is therefore important to have a good understanding of the features of the different types of products available and which could be the most appropriate for you.
The following types of annuity and life insurance contracts are generally available in Switzerland:
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Secures a regular income for life - starting immediately. For a one-time payment the insurance company agrees to pay a regular income for a specific period of time, usually until the annuitant’s death. |
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Secures a regular income for life - starting at a certain date in the future. Accordingly, there are two phases: the accumulation phase, where the money is allowed to grow (like in a pure endowment), and the payout phase. A deferred annuity can either be variable or fixed. |
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Saves a specific sum of money within a certain period of time. For a one-time payment or with regular premium payments, a specific capital is accumulated until a defined date in the future. |
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Tailor-made, variable endowment policy, where the underlying investments are determined individually by the client and are individually directed by an asset manager. Portfolio bonds are sometimes also referred to as “insurance wrappers”. |
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Saves a specific sum of money within a certain period of time while also giving life protection during this time. |
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Protects family, personal and business interests with lifetime cover - with the option of receiving a savings component if the protection is no longer needed. |
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Protects family, personal and business interests during a certain period of time only (available only for Swiss residents). |
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Protects family, personal and business interests during a certain period of time only, with the level of protection decreasing in time. This is useful in cases such as the need to pay off a mortgage (available only for Swiss residents). |