Life Annuity: Understanding the Basics

Article Summary

If your retirement is approaching, you might be wondering whether your retirement savings are sufficient to provide you with a comfortable life. A life annuity can be the investment vehicle that can ensure monthly payments for the length of your life.

A life annuity can also be an alternative to a life insurance policy since you can add a death benefit rider and guarantee financial stability for your heirs.

Keep reading to find out more about life annuities, their types, and eligibility.

What Is a Life Annuity?

A life annuity is a financial product that is purchased from an insurance company. It offers a guaranteed income during retirement. In order to secure a periodic income stream, a life annuity owner pays either a lump sum or a series of premiums.

A life annuity policy provides you with a guaranteed retirement income no matter how long you will live. Depending on the type of your annuity, your partner can continue receiving payments, or your beneficiaries will inherit an accumulated death benefit.

How Does Life Annuity Work?

Life annuities are investment opportunities just like stocks, but they can also be offered by life insurance companies. Typically, you can invest a lump sum payment or a series of period payments for your life annuity.

Life annuities have two phases: when you pay and when the annuity provider pays you. First, you invest a predetermined amount of money, and then the annuity provides you with a stable monthly flow of income.

In case of the annuitant’s death, the payments cease. In case you have a joint annuity, your partner will continue to receive the remaining regular income. And if you have purchased an additional rider, your beneficiary will be transferred the remaining amount of your income annuity.

Types of Life Annuity

When it comes to purchasing a life annuity to diversify your retirement income, there are several types to choose from.

Immediate Annuity

An immediate annuity is the most basic product offered. You make a single lump sum payment and receive a guaranteed income almost immediately.

The series of payments will continue until a predefined date based on the policy type, interest rate, and other factors.

An immediate annuity is a suitable option for people looking for a safe return on investment that they will not outlive.

The payment for immediate annuities is generally fixed, but you can opt for a variable alternative.

Deferred Annuity

Unlike immediate annuities, a deferred annuity is an investment in your future. Similarly, you invest a significant portion of your capital to convert into a series of payments that will start at a future date.

Deferred annuities can be further divided into variables, fixed and indexed, each offering their benefits to annuitants.

Fixed Annuity

Payments with fixed annuities ensure a guaranteed and specific interest rate for your investment.

Variable Annuity

Variable annuity payouts offer an interest rate that can fluctuate with time. The interest rate usually depends on the performance of your investment portfolio.

Indexed Annuity

Indexed annuities pay an interest rate that depends on the performance of the market index, such as SP 500. When the market index performs well, you benefit from a higher interest rate, but at the same time, you are protected from major losses when the market declines.

Which Life Annuity Should You Choose?

Life annuities provide a regular income stream during retirement. Hence, the product is best suited for people aged between 55 to 75. Here are some of the specific annuities you may be interested in:

Single Life Annuity

A single or straight life annuity is a financial product designed for a single person who doesn’t have anyone to leave generational wealth to. This type of annuity pays out a monthly income to a person for the duration of their life. The payments stop when an annuity holder dies.

Joint Life Annuity

A joint life annuity is a product suitable for a couple. Such an annuity provides income to a surviving partner when the annuity owner dies. Depending on the contract, a surviving partner can receive the full price or a slightly lower percentage of the payments.

A Life Annuity with a Guaranteed Income Rider

Straight life annuities usually belong to a single person who receives retirement income for the rest of their life. If you want to leave your legacy and transfer the remaining value to your heir, you should consider a guaranteed income rider. This way, you will maintain an additional source of income and not worry about the financial security of your beneficiaries.

Secure Your Retirement Income with a Life Annuity

We all know that in times of inflation, it’s daunting to save up money for retirement. Fortunately, there are investing options available to help increase your savings immediately or over time and enjoy the rest of your life caring only for yourself.

Although investing is never flawless, you have the power to choose the safest option of all. Consider one of the life annuities either for yourself or together with your partner, and live your life worry-free.