Today we’ll discuss an insurance product that has been described as the “inverse of life insurance” and like life insurance, has been around for centuries. The term annuity is derived from the Latin word “annua” which in Roman times referred to annual stipends. Present day annuities generally consist of regular (most commonly monthly) payments made to a beneficiary by an insurance company. Payments can be structured for a specific period of time, say ten years, or for the remainder of an annuitant’s life. In the case of a joint and survivor annuity payment, the income stream can continue until the passing of the second to die. An astute observer once described the function of both products by stating, “people buy life insurance to protect against dying prematurely and purchase annuities to protect against living too long.”

Our next four postings will deal with risk, and in particular, the concept of risk transfer via insurance. Everyone on earth faces risks of various kinds. Premature death, loss of a dwelling, liability for causing a loss to another party, inability to perform activities of daily living and suffering a severe financial loss are only some of the risks we encounter in life. We may have choices to (1) Retain the risk (2) Avoid the risk (3) Reduce the risk and (4) Transfer the risk to another party. Insurance involves option #4 in that it allows us to bring in another entity which will assume some of the financial burden caused by the catastrophic event.

When people consider the subject of long-term care, they often think about nursing homes. In fact, long-term care has little to do with nursing homes. Understanding the difference can help you protect your family and finances.