Understanding The Difference Between Annuity And Life Insurance In Nigeria
Insurance is an aspect of investment everybody knows and life insurance in Nigeria is arguably the best part of insurance in Nigeria. So, I guess that you must have come across terms like “annuity” and “life insurance.”
They are both aspects of insurance but they are different to a great extent. They can both play a significant role in your financial plans. Your decisions on insurance should be very educated and that is why you need to understand the differences between annuity and life insurance in Nigeria.
When you understand the differences between the two, it will help you figure out what exactly your needs are and prevent you from paying for what you don’t need.
The similarity between annuity contract in Nigeria and life insurance in Nigeria is that both of them are both insurance products and packages in Nigeria. The difference however lies in their mode of payment.
While an annuity contract pays a specified amount on a monthly, quarterly, or annual basis to meet future financial needs, life insurance pays the value of the policy at the time of your death.
We shall look at the two of them and bring out more differences.
Understanding Annuity Contract?
Annuity contract is a contract in which an insurance company pays you at regular intervals (monthly, quarterly or yearly) in return or more premiums that you have paid. They are usually bought for future retirement income. The implication of having annuity is that you continue to earn after retirement.
It is essential you know that an annuity is not a life insurance policy and it is neither a health insurance policy. It’s also not a savings account or a savings certificate. And it is not a contract you can buy in order to reach short-term financial goals.
Your value in an annuity contract is the amount you have paid in premiums, plus any interest your premiums have earned, minus applicable charges.
There are two ways to pay your premiums:
You can pay in either one payment for a single premium annuity. For example, you can wait until you retire and then move a lump sum from your pension plan to an annuity in order to collect monthly payments from it. This would be considered a single premium annuity.
You can also pay in a series of payments for a multiple premium annuity. For example, if you decide at a young age to start saving for retirement, you might choose to purchase an annuity and make smaller monthly payments of $250 into the plan over a period of 30 years.
This is a good example of a multiple premium annuity. Payments for a multiple premium annuity can be made either at fixed intervals (monthly, weekly, etc) or in flexible payments, allowing you to pay as much premium as you want within set limits.
Types of Annuity Contract
Annuity contract is broadly classified into two:
- Immediate Annuity
- Deferred Annuity
The immediate annuity begins payment within one year of premium payment. Most of them actually start payment within one month or two months of receiving a premium payment. As a result of this reason, immediate annuities must be purchased using a large lump sum single premium. You should know that you cannot purchase an immediate annuity with multiple premiums.
A deferred annuity on the other hand, delays payment until a later date as specified in your annuity contract. This could be 10 years, 20 years, or even more. You can purchase a deferred annuity with either a single lump sum premium payment or multiple premium payments.
What is a Life Insurance Policy?
Life insurance is distinct from annuity contract. It is a contract you enter into with a life insurance company. Life insurance in Nigeria focuses on providing a death benefit to your beneficiaries once you die. It is tax free. The essence of life insurance in Nigeria is to allow your beneficiaries to maintain the same standard of living or pay off large expenses.
Types of Life Insurance In Nigeria
There are basically two types of life insurance in Nigeria. there is whole life insurance and term life insurance.
The whole life insurance in Nigeria pays the face value of the policy of your beneficiaries at the time of your death. This is paid based on the premium you have paid over the years. The premium may be paid as a single lump sum (single premium whole life insurance) or over a period (such as 10, 20, or 30 years).
Term life insurance in Nigeria on the other hand has a face value from the time of purchase to the end of a specified duration. The duration could be 5, 10 or 20 years. After this duration, the insurance expires and loses its value.
Annuity is important and life insurance in Nigeria is also important. You should chose the one you want based on your needs.