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This annuity can be compared to a loan which is made by the purchaser to the issuing company, who then pay back the original capital with interest to the annuitant on whose life the annuity is based. The assumed period of the loan is based on the life expectancy of the annuitant but life annuities are payable until the death of the last surviving annuitant. In order to guarantee that the income continues for life, the investment relies on cross-subsidy. Because an annuity population can be expected to have a distribution of lifespans around the population’s mean (average) age, those dying earlier will support those living longer.
Cross-subsidy remains one of the most effective ways of spreading a given amount of capital and investment return over a life time without the risk of funds running out.
- IRAs - A traditional IRA is an individual retirement arrangement (IRA) in the United States. The IRA is held at a custodian institution such as a bank or brokerage, and may be invested in anything that the custodian allows (for example, a bank may allow certificates of deposit, and a brokerage may allow stocks and mutual funds).
- Annuities - A life annuity or lifetime immediate annuity is most often used to provide an income in old age (i.e., a pension).