I refer to the letter from Dr Vincent Chia Wei Meng entitled "The numbers tell the story" (Today, 4 Oct 2007).
Dr Chia argued that life annuity is a disadvantage for the poor. He quoted studies that showed poor people have a shorter life expectancy, compared to people who are better off.
This is probably correct, but in a general sense. There are poor people who are healthy and can live longer. It depends on each individual.
If a person knows that his or her health is poor, and is like to have a shorter life expectancy, then this person should avoid buying a life annuity, or should buy a life annuity that provides a partial refund on early death.
The majority, who are in normal good health for their age, should buy a life annuity.
Poor people need the pooling of longevity risk in a life annuity more than the wealthy. The wealthy people have sufficient money to last for more than a lifetime and do not need to pool this risk.
The advantages of a life annuity outweigh the perceived disadvantage, even for poor people. Here are the benefits:
* They do not have to manage their money. The annuity provider takes care of this matter.
* By investing in an annuity fund, the annuitant can get a better return on their money, compared to investing on their own
* They participate in the pooling of longevity risk.
Those who are very poor probably do not have sufficient money to buy a life annuity that can give an adequate income for a life time. With a small capital sum, they can only buy a small payout. They will still need some financial assistance to top up this small payout.
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