What is a Life Annuity and How Does It Work?

Shawn Plummer

CEO, The Annuity Expert

If you are retired or nearing retirement, you may wonder what your options are for generating income. One option that you may have heard of is a life annuity. But what is a life annuity, and how does it work? In this guide, we will answer those questions and more! We will discuss the different types of life annuities available and the benefits and drawbacks of each. By the end of this guide, you will better understand what a life annuity is and whether or not it is the right choice for you!

What Is a Life Annuity?

A life annuity is a contract between you and an insurance company. You make a lump sum payment to the insurer, and they agree to make regular payments to you for the rest of your life. The payments can be made monthly, quarterly, or yearly, and they can be for a fixed amount or variable amount.

The payments will continue until you die, even many years from now.

How Does A Life Annuity Work?

Many people looking to secure their financial future opt for a life annuity. But how does a life annuity work? Essentially, you hand over a lump sum of cash to an insurance company in exchange for regular payments that start immediately or at some point in the future. The size of your payments will depend on several factors, including your age, gender, health, and interest rate.

The beauty of a life annuity is that you know exactly how much income you will have each month, which can be helpful in budgeting and planning for retirement. Plus, your payments are guaranteed for life, even if you live to be 100!

However, it’s important to remember that once you purchase a life annuity, you cannot access the money you’ve invested. So it’s critical to make sure that a life annuity is a suitable choice for you before making any decisions.

Life Annuity Types

There are two main life annuities: immediate annuities and deferred annuities. You make your lump sum payment with an immediate annuity and begin receiving payments right away. With a deferred annuity, you make your payment now but don’t start receiving payments until some point, such as when you retire.

There are also two main payout options for life annuities: fixed and variable payouts.

  • With a fixed payout, you will receive the same amount each month, quarter, or year for the rest of your life.
  • With a variable payout, the amount you receive each period will depend on the performance of an underlying investment, such as stocks or bonds.

Benefits of Life Annuities

Several benefits make life annuities an attractive option for retirees and near-retirees. One benefit is that they can provide a guaranteed income stream for life. This can be especially helpful if you are worried about outliving your savings.

Another benefit of annuities is that they can help to hedge against inflation. With a fixed payout, your payments will not decrease if inflation increases. And with a variable payout, your payments could increase if the underlying investment performs well.

Drawbacks of Life Annuities

Of course, there are also some drawbacks to consider before purchasing a life annuity. One drawback is that you will not have access to your money once you make the lump sum payment. This means you must be confident that you will not need the money for other purposes, such as long-term care or unexpected expenses.

Another potential drawback is that life annuities are not always easy to understand. The terms and conditions of each contract can be complex, and it can be challenging to know what you are signing up for. Therefore, it is essential to do your research and work with a financial advisor (like us!) who can help you understand the details of the contract before making a decision.

Finally, keep in mind that life annuities are not suitable for everyone. If you are comfortable with the risks and are confident that you will not need access to your money, then a life annuity can be a good option. But if you are not comfortable with the risks or unsure about your future needs, another retirement income strategy may be better for you.

Do You Need a Life Annuity?

If you’re nearing retirement and are looking for a guaranteed income stream, a life annuity may be worth considering. But it’s important to research first to understand the contract details and available options. Contact us today for a free quote so you can decide whether a life annuity is right for you. Weighing the pros and cons of a life annuity can help ensure you make the best decision for your future.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

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