The Life Annuity

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What is a Life Annuity?

A life annuity is a financial contract between you and an insurance company. In exchange for a lump sum payment or a series of payments, the insurer promises to make periodic payments to you for the rest of your life. Think of it as a reverse life insurance policy: instead of paying regular premiums to receive a lump sum upon death, you pay a lump sum upfront to receive regular payments for as long as you live.

Helpful Tool: Life annuity calculator

How Does a Lifetime Annuity Work?

The mechanics of a lifetime annuity are straightforward. Once you purchase the annuity, the insurance company invests your money. The returns on these investments, combined with the principal amount, are then distributed to you as annuity payments. These payments can be monthly, quarterly, or annually, depending on the life annuity option you choose.

Life Annuity

Life Annuities Pros and Cons

Pros:

  • Guaranteed Income for Life: The primary benefit of a life-only annuity is that it ensures you won’t outlive your savings.
  • Predictability: Life annuity payments are consistent, allowing for better financial planning.
  • Tax Benefits: Part of the annuity payment is considered a return of principal and is thus not taxable. (nonqualified annuities only)

Cons:

  • No Death Benefit: One significant drawback is that most life annuities come with no death benefit. If you die shortly after purchasing, the insurance company keeps the remaining funds.
  • Inflation Risk: Fixed annuity payments might not keep up with inflation, reducing purchasing power over time.
  • Lack of Liquidity: Once invested, it’s challenging to access the lump sum without incurring penalties.
What Is A Life Annuity?

Life Annuity Options

There are several life annuity options to cater to different needs:

  • Single-Life Annuities: These are solely for the purchaser. Payments cease upon their death.
  • Joint-Life Annuities: Designed for couples. Payments continue until the death of the last surviving partner.
  • Life Annuity with Period Certain: Guarantees payments for a specific period, even if the annuitant dies within that timeframe.
Life Only Annuity

Annuitization vs. Guaranteed Lifetime Income Riders

Annuitization is the process of converting your annuity into periodic income payments. It’s irreversible. On the other hand, guaranteed lifetime income riders are optional benefits that can be added to an annuity contract. They offer income for life without giving up control of the principal amount. This flexibility comes at an additional cost but can be worth it for those seeking both income and potential inheritance for their heirs.

Lifetime Annuity

Next Steps

Life annuities can be a cornerstone of a robust retirement plan, offering the peace of mind that comes with guaranteed income. However, like all financial products, they come with both benefits and drawbacks. It’s essential to understand the nuances of life annuities, from the basic “what is a life annuity?” to the complexities of annuitization and income riders.

Your financial future is paramount. As you consider annuities for life, weigh the pros and cons, understand the various life annuity options, and always seek expert advice tailored to your unique situation. With the right knowledge and guidance, a life annuity can be valuable in achieving a secure and comfortable retirement.

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Questions From Our Readers

What is a life annuity benefit?

The primary benefit of a life annuity is the guarantee of a steady income for the remainder of the annuitant’s life. It provides financial security and peace of mind, especially in retirement, as it eliminates the risk of outliving one’s savings.

What does the annuity income for life mean?

Annuity income is the financial return you receive from an annuity, a contract you enter into with an insurance company. Simply put, you make an initial investment (or series of investments), and the company, in return, makes regular income payments to you for a certain period – often for the rest of your life. This is where the term “income for life annuity” comes from.

What is a pure life annuity?

A pure life annuity is a financial product that allows you to invest a lump sum, typically at the time of retirement, with the promise of receiving regular payments for the rest of your life. With its promise of steady income, this option can provide a level of security paramount in the uncertainty of our retirement years.

What is a single-life annuity?

A single-life annuity (SLA) is a type of annuity that pays out to the owner for their lifetime. The payout amount will depend on how much money was invested and when they start taking payments from the SLA.

What age do you draw from an annuity for life income?

Typically, at retirement, but it’s flexible based on your contract.

What is the best age to take annuity lifetime payments?

It depends on your financial situation. However, the day you start retirement is the typical age.

When does a life annuity end?

A life annuity typically ends upon the death of the annuitant, the individual whose life expectancy is used to determine the annuity payments.

What is the current interest rate on an immediate life annuity?

The interest rate on immediate life annuities varies, but as of now, it’s roughly around 1.5%. This rate can fluctuate based on market conditions and the specifics of the annuity contract.

What’s the difference between a joint and 100% survivor annuity and a single life with a 30-year guarantee annuity?

The main difference lies in who receives the benefits and for how long. In a joint and 100% survivor annuity, payments continue for as long as either you or your designated partner (usually a spouse) is alive. Even after one of you passes away, the survivor keeps receiving 100% of the original payment. Once both spouses die, there is no death benefit for beneficiaries. On the other hand, a single life annuity with a 30-year guarantee pays out to you alone for your lifetime. Still, if you pass away before the 30 years are up, the payments will continue to a beneficiary of your choice until the 30-year period ends.

Is a single-life annuity considered a pension?

Yes, a single-life annuity can be seen as a type of pension. When people retire, their pension often provides them with regular payments, and a single-life annuity is one way these payments can be made. With a single-life annuity, the retiree receives payments for their lifetime, but there aren’t any survivor benefits for beneficiaries after they pass away. So, in simple terms, while a single-life annuity is just one choice within a pension plan, it’s still a way for retirees to receive their pension payments.

Why would a single premium immediate annuity with a 10-year certain and life option have a greater monthly payout than a life-only annuity?

Typically, it’s the other way around: a life-only annuity generally offers a higher monthly payout compared to a 10-year certain and life annuity. The reason is risk distribution. In a life-only annuity, payments are made as long as the annuitant is alive, with the risk being if the annuitant passes away early, no further benefits are paid. In contrast, a 10-year certain and life annuity guarantees payments for at least 10 years, even if the annuitant passes away sooner. This added guarantee reduces the risk for the beneficiary but also means the insurer takes on more risk and thus usually offers a lower monthly payment to balance this. If you’re finding a 10-year certain and life annuity offering higher payments than a life-only annuity, it might be due to specific terms of the annuity or unique circumstances of the annuitant.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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