Life Annuity With Guarantee is Best

Feb 16, 2009 (Vanguard/All Africa Global Media via COMTEX News Network) -- Insurance companies have before the advent of Pension Reform Act 2004, been offering annuity products in various forms to some life insurance policyholders.

But little or nothing was known to the general public about annuities until life annuities was made a mandatory option for retirees who maintained retirement savings accounts (RSAs) under the Pension Reform Act. Section 4(1)(b) "annuity for life purchased from a life insurance company licensed by the National Insurance Commission (NAICOM) with monthly or quarterly payments.

Mr. Ezekiel Chiejina, the Director-General of the Nigerian Insurers Associations in this interview with Patience Saghana explains in simple terms what annuities is all about the benefits to the Nigerian populace. Excerpts

What is annuity and why was it made mandatory under the Pension reform Act?

An annuity is periodical payments made to a person either out of investment or pension fund. What we have in Pension Reform Act is compulsory pension annuity purchased from the proceeds of retirement saving account. At the time of retirement, the retiree uses a lump sum from the balance in his or her RSA, and buys life annuity from an insurance company. In return the insurance company continues to pay to the retiree (annuitant) a monthly or quarterly income for life i.e. until the retiree or annuitant dies. Pension annuity was made compulsory by the Act to ensure that the philosophy and objective of the pension reform is achieved i.e. to ensure that when an employee or worker retires, he or she will continue to receive income no matter how small until he or she dies.

In case of a sudden death of a retiree who had for many years bought an annuity for life, what happens to the lump sum he or she had paid?

Annuity contracts (or products) offered by insurance companies make provision for such situations. That is why annuities are guaranteed for a period of 10 years. The guarantee means that even if the retiree dies early, the income must be paid for a minimum period of 10 years, or the equivalent balance is payable to the nominated beneficiary or the retiree's estate. In fact, the Regulation issued under the PRA provides for a minimum guarantee period of 10 years.

Does annuity payment take account of inflation?

To counter the effect of inflation on annuity income, insurance companies offer what is called increasing or escalating annuities, whereby the income increases by a fixed percentage of say, 5% every year, or in a developed environment, it may increase in line with retail price index.

Can you mention the types of annuity products that are readily available?

There are many. But let us look at a few, such as "Guaranteed annuity, Increasing Annuity, Annuity Certain, Temporary Annuity, Joint Life Last Survivor Annuity, Contingent Revisionary Annuity; and Impaired Life Annuity. There are also Immediate and Deferred Annuities.

Guaranteed Annuity, as already discussed above is the type PRA prescribes; the income will be payable for life or ten years, which is longer. I have also discussed increasing annuity.

You also have Annuity Certain and Temporary Annuity. Annuity certain is a contract to pay annuity for a specified period regardless of whether the annuitant survives. It does not depend on the age of the annuitant. On the other hand Temporary Annuity provides to pay annuity for a fixed period or for the annuitant's life time whichever is shorter.

Although Pension Reform Act did not mention annuity certain or temporary annuity, the "programmed withdrawal' under the Act falls into these categories of annuities, especially the temporary annuity.

We also have Joint Life and Last Survivor Annuity. This may be used by married couple to provide for their retirement. This product pays annuity for the joint lifetimes of the two annuitants as payment will continue, in full or at a reduced rate, after the first death.

There are also Contingent Revisionary Annuities whereby payments are made to a specified person commencing on the death of another specified persons, subject of course to the former being alive. This may typically be used for a husband and wife with annuity payable to the wife commencing on the death of the husband.

Guaranteed Life Annuity seems to be the most ideal but why did the law provide for the programmed withdrawal?

Yes. Life annuity with guarantee is the ideal and which is in line with the philosophy and objective of the PRA. The reason for the option of programme is not clear. However, from insurance point of view, a retiree who, for medical reasons, feels he or she has short expectation of life may not want to purchase a life annuity. As a matter of fact, some insurance companies offer what is called impaired Life Annuities which pays higher annuity if the policyholder can prove at the outset that he or she has a very short expectation of life.

Do insurance companies screen people medically before issuing annuity policy like they do for life insurance policy?

No. Unlike life insurance, medical risk assessment is not involved in accepting persons for annuity policy. Rather where people have choice, it is most likely that only persons who are healthy and believe they will live long to benefit greatly from annuity that will purchase life annuity. The fact that some people live very long up to 90 years cause longevity strain on insurance companies' annuity fund.

The Act states annuity can be obtained from life insurance companies and why not insurance companies instead of the emphasis on Life companies?

Annuity and pension are regarded by Insurance Act 2003 as life assurance, and as such any insurance company licensed by NAICOM to transact life insurance business can offer annuities. There are at present three categories of insurance companies recognized by Insurance Act, non-life or general business, life business, and composite business.

Of the three categories, only non-life or general business is not allowed to transact life insurance or annuities.

Is it only employees who maintain retirement savings account that can buy annuities?

No. Don't forget that the PRA does not make contribution or membership of the scheme compulsory for some people, for example self-employed professionals, businesses where the member of employees are less than five, traders, etc.

These categories of persons can buy individual life insurance products, or personal pension, to mature at age 50, 55, 60 or even 65. At maturity, they can equally use lump sum to purchase annuities from insurance companies and receive annuity for life.

It is the business of insurance companies to educate this segment of the insurance market, and market life insurance, pensions and annuity products to them.