Death Annuities

Like many terms in Finance, annuity has several different meanings. In the textbook, we define an annuity as a stream of payments over some specific period. In the insurance industry, an annuity is a tax-deferred account that allows for savings and investment. The investment vehicles can vary from a fixed rate investment to a variable annuity that allows for investments in the stock market. The insurance annuity is similar to our textbook definition of an annuity since unless it is terminated early, at some point the annuity will be annuitized, that is, a stream of payments will be made from the balance of the account. Since they are sold by insurance companies, an annuity also has a death benefit. However, a loophole in annuity contracts has allowed Joseph Caramadre to make upwards of $15 million from the death of annuitants. For an audio version, listen here.