What is a life annuity?: How it works


After a long period of work, what you want is to rest, make better use of your time, share it with your family and, above all, have a pension that gives you financial peace of mind.

A life annuity is an insurance in agreement with an insurance company, which offers a retirement modality and guarantees a monthly income (pension) that remains fixed during your life.

What is the life annuity?

It is the contract through which an insurance company pays a pension in exchange for receiving the accumulated balance in an individual account. The amount of this pension will be calculated taking into account the balance of the individual account after deducting the amount necessary to contract survival insurance in favor of the contracting party’s beneficiaries, the age of the member and that of his or her beneficiaries, the table of mortality and the expected rate of return.

To contract a life annuity, the following is recommended:

Search and analyze the life annuity proposals made by various insurance companies. Choose the one that best suits your economy.

Submit a withdrawal request to the IMSS, accompanied by the necessary documents to verify the rights of a pensioner.

In accordance with the IMSS resolution, the Afore that manages the individual account values ​​the shares of the Siefores in which the retirement savings are invested and adds to that amount the balance that appears registered in the housing subaccount.

In the case of the voluntary contributions subaccount, you must indicate if you want a portion of that balance to be delivered to the insurance company. Considering that the amount of the pension depends on the accumulated amount.

The insurance company receives the total amount transferred from the Afore, establishes the Survival Insurance in favor of its beneficiaries, and determines the amount of the pension and the way in which it will be updated over time. The insurance company must deliver the pension monthly.

The programmed withdrawal consists of a gradual de-accumulation of the fund according to the worker’s probability of survival.

How many times can you choose an insurer for the pension?

This choice is made only once, which cannot be changed at the time the pension payment begins.

The objectives of the pension system

Guarantees a financially viable pension, since it increases annually according to the Consumer Price Index (CPI).

It ensures full ownership and control over your savings.

It protects the income stream of a worker and his family.

The current or future income stream of a family can be interrupted by various events: old age, premature death, accidents, and illnesses that make it impossible to continue with productive activities, so this is a good option to protect yourself against these contingencies.

The purpose of pension systems is that workers have, at the time of retiring from active working life, sufficient monetary resources that allow them to reach a certain level of consumption.

Pension plans generally also protect the economic dependents of the worker, in the event of his death.

Observations on the life annuity system:

  1. If the interest rate granted by the Siefores in the future is higher than the inflation rate, then they provide a higher amount of life annuity.
  2. To the extent that the contribution percentage of the worker’s salary that goes to the retirement subaccount increases based on the additional contributions, it allows granting a higher income.
  3. It is advisable to analyze the pension amount at present value since it could be an amount that is not enough to cover all the expenses that a family normally has.

To set the amount of the desired life annuity, it is necessary to consider the following factors:

  • Clearly define the amount of life pension that you want to obtain at the time of retirement.
  • Locate the rate that the pension funds will pay on average.
  • Determine the additional contribution amounts they will need to build the required amount of investment.
  • Establishing the estimate of the pension that you want to obtain with the current value will help us to check if our financial projection is correct.

Planning in detail the strategy to achieve the financial objectives of our retirement is very important to start the required savings at the appropriate time. Insurance for a life pension can be an answer to guarantee financial stability in our maturity; however, we recommend in-depth research and consultation with a professional advisor in making this decision.

By Master James

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