Furnishes an Assured Income in the Form of Annuities

Furnishes an Assured Income in the Form of Annuities.
Life insurance also proves valuable to a very considerable
number of people, who, as the result of a lifework have suc-
ceeded in saving only a limited amount of capital, and who
have no one to whom they particularly care to transfer this
sum in case of death. Thus, let us assume that a person aged
60 has accumulated $10,000, and that this represents the
entire estate available for the maintenance of the owner dur-
ing his later years. Owing to the limited size of the estate,
the owner will be obliged to invest the same in the most care-
ful manner, and the current rate of return for such invest-
ments would probably not exceed 4 per cent. Consequently
this individual's income will be limited to $400, an amount in-
sufficient for proper maintenance during old age. Xor can he
afford to take a portion of his principal for living expenses,
because this would reduce his annual income. The danger
confronting him is just the opposite of that facing the man
who wants insurance against death. The latter wants insur-
ance because he does not know how long he will live, while
the former is confronted with the danger of living too long,
i.e. of outliving his income.

Just as the man who felt that death might intervene too
soon, could hedge himself against that risk, so our owner of
the $10,000 fund, who feels that his income is too limited and
that he might outlive this income if he should resort to the
expenditure annually of a portion of the principal, can pro-
tect himself by buying an " annuity." An annuity is a con-
tract by which an insurance company promises to pay the
holder thereof a certain stipulated income every year as
long as he lives, the payment ceasing upon death. Thus, for
illustrative purposes, let us apply an annuity to a man agedr
60 who has saved $10,000, which sum, as stated, will yield only
$400 income a year if invested at 4 per cent. Now, to quote
the rates of a certain company for annuities, this individual
may deposit $1,066 and receive therefor a promise of an
income of $100 a year throughout life. This sum, it will be
observed, represents a yield of 9 per cent., or more than twice
as much as the assumed current rate of 4 per cent. The
older the annuitant is when he buys an annuity the larger is
the annual return the company can afford to give. Thus if
the individual, assumed in our illustration, should be sixty-
six years old this same company promises him $100 a year
throughout life for each $888 paid in, or over 11 per cent.
At age 70 the $100 annuity will cost only $630, or an annual
return four times greater than the 4 per cent, rate used for
illustrative purposes. If, therefore, the holder of a limited
estate does not particularly care to transfer his property to
some individual or institution, life insurance makes it possible
for him to pay the same to an insurance company in return
for a promise of a certain definite income a year, thus reliev-
ing him from all further worry as to the sufficiency of his
future income. The companies can afford to give these large
returns at the later years of life because the death rate at age
60 and thereafter is high and because of the understanding
that the annuities "will cease just as soon as the annuitant
dies, in which case the balance of the money deposited with
the company goes to the benefit of the other annuitants who
may survive.

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