What Is The Lifetime Annuity

Shawn Plummer

CEO, The Annuity Expert

Today, we’ll be navigating the world of annuities and, more specifically, zeroing in on lifetime annuities. This topic often conjures up a labyrinth of complexities, but don’t worry—we’re here to simplify it for you. We’ll answer your burning questions like “What is a lifetime annuity?” and “How does a guaranteed lifetime annuity work?” we’ll delve into whether buying a lifetime annuity is a good idea for your personal finance strategy. So, please sit back, relax, and let’s decode the jargon to unveil the magic that lies within a lifetime annuity.

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What is a Lifetime Annuity?

In its most basic form, a lifetime annuity is a contract between an individual (the annuitant) and an insurance company. This agreement allows the individual to exchange a lump sum or a series of payments for a stream of income that will last for the rest of their life. In essence, the annuitant is guaranteed not to outlive their income—giving you a sense of financial security that few other investment vehicles can offer.

Example: For instance, imagine Jane, a 65-year-old retiree, has $200,000 in savings. She decides to purchase a lifetime annuity from a reputable insurance company. In exchange for her savings, the insurance company guarantees her a steady monthly income of $1,200 for as long as she lives. No matter if Jane lives to 75 or 105, she will continue to receive this income.

Diving Deeper into the Concept

To fully grasp the lifetime annuity definition, we need to tackle its distinctive features:

  • Lifetime Annuity Income: As the name suggests, a lifetime annuity guarantees regular income payments for as long as the annuitant lives.
  • Guaranteed Income: The insurance company guarantees the income from lifetime annuities, providing a steady, reliable source of income that can be a comfort in volatile markets.

Example: On the other hand, John is a 70-year-old retiree who has also invested $200,000 in a lifetime annuity. Since he purchased his annuity at an older age than Jane, his guaranteed monthly income is higher, say $1,300.

Lifetime Annuity

How Does a Guaranteed Lifetime Annuity Work?

At this juncture, you may wonder, “How does a lifetime annuity work?” or, more specifically, “How does a guaranteed lifetime annuity work?”

A guaranteed lifetime annuity is a particular type of lifetime annuity. The critical difference is the guaranteed aspect—whether the markets rise or fall, the annuitant lives longer than expected, and the income from a guaranteed lifetime annuity is guaranteed.

Example: Susan, a 65-year-old, purchases a guaranteed lifetime annuity for $300,000. The insurer promises her a monthly payment of $1,800 for the rest of her life. Even if the market fluctuates and the insurance company’s investments underperform, Susan’s income will remain untouched at $1,800 a month.

The Intricacies of a Guaranteed Lifetime Annuity

Here’s how it works. You buy the annuity, often by making a lump-sum payment or a series of payments over time. Then, the insurance company begins making regular payments to you for the rest of your life. For those interested in math, a guaranteed lifetime income annuity calculator can illustrate your potential returns based on different factors.

Example: Consider Paul, who opted to fund his annuity gradually over several years instead of a lump-sum payment. He contributed $2,000 monthly for ten years before retiring. Once he retires at 65, his guaranteed lifetime annuity starts paying him a monthly income, regardless of how long he lives.

Guaranteed Lifetime Annuity Calculator

Use our calculator to determine the best lifetime annuity rates for guaranteed retirement income.

Are Lifetime Annuities a Good Idea?

Like all financial decisions, lifetime annuities’ appropriateness depends on your circumstances. However, lifetime annuities do offer significant benefits:

  • Steady Income Stream: Lifetime annuities provide a guaranteed income stream, ensuring you’ll never outlive your savings—a considerable advantage in an era of increased life expectancy.
  • Low Risk: Since the insurer guarantees the payments, lifetime annuities carry a lower risk than other investment options.

However, there are a few caveats to bear in mind.

Example: Emily, for example, is an investor who values stability over high returns. She knows the stock market can potentially yield higher profits, but she prefers the guaranteed income from her lifetime annuity because it means she won’t outlive her savings.

Lifetime Annuities

The Best Age to Buy a Lifetime Annuity

Deciding when to buy a lifetime annuity can significantly affect your retirement income. Generally, the older you are when you purchase a lifetime annuity, the higher the annual payments. However, starting earlier might allow you to accumulate more total income over your lifetime. So, it’s crucial to consider factors like life expectancy, the need for immediate income, and market conditions when determining the best age to buy a lifetime annuity.

Example: Robert bought his annual annuity at 60, receiving $700 monthly. On the other hand, his friend Linda bought her annuity at 70 and received $1,100 a month. Although Linda receives more per month, Robert, starting earlier, may collect total income if both live to the same age.

What Are Lifetime Annuities

The Final Word on Lifetime Annuities

Lifetime annuities can provide peace of mind, especially if you fear outliving your savings. They offer a predictable and steady income guaranteed for as long as you live, regardless of how the market performs. However, investing in one should be made considering your overall financial plan, retirement goals, and life expectancy.

Fixed Lifetime Annuity

Before we wrap up, let’s touch on another type: a fixed lifetime annuity. A fixed lifetime annuity is a form of lifetime income annuity that guarantees a set amount of income for the annuitant’s lifetime, unaffected by market fluctuations.

Example: Consider Sarah, who invested $250,000 into a fixed lifetime annuity at age 65. The insurance company guarantees her a lifetime monthly payment of $1,500, unaffected by how well or poorly the market performs. Her fixed and reliable income provides financial stability in her retirement years.

Next Steps

In conclusion, a lifetime annuity could be the financial security you need in retirement. They provide guaranteed lifetime income that can help stabilize your finances, especially in an uncertain market. However, they should be chosen wisely, with an eye on the individual’s overall financial situation and retirement goals.

What Is A Lifetime Annuity

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Frequently Asked Questions

Are lifetime annuities a good idea?

Yes, lifetime annuities can be an intelligent way to secure your future retirement income.

How much does a $100 000 annuity pay per month?

A $100,000 annuity typically pays around $500-$700 monthly.

How much do lifetime annuities pay?

Lifetime annuities pay a fixed payment for life, depending on the amount invested and the investor’s age.

What is the best lifetime annuity?

The best lifetime annuities depend on individual income needs and financial goals. Because rates change frequently, the products change frequently.

Do pensions provide a guaranteed income?

Yes, pensions typically provide a guaranteed income in retirement.

What is the best source of retirement income?

The best source of retirement income commonly includes Social Security, pensions, annuities, and investments.

Do annuities provide lifetime income?

Yes, annuities provide the option to receive lifetime income.

How does an insurance company’s claims-paying ability affect the pricing of a lifetime annuity?

The claims-paying ability of an insurance company significantly impacts the pricing of lifetime annuities.

How much does a $500,000 annuity pay per year?

Generally, a $500,000 deferred annuity will provide more than $20,000 per year, depending on certain factors.

How does a guaranteed lifetime annuity work?

Guaranteed lifetime annuities pay out a fixed income stream to the policyholder for their lifetime. The rate of return is based on age and gender at the time of purchase; payments are made until death.

How does a life annuity work?

A life annuity pays out a guaranteed lifetime income stream until the annuitant’s death. Although the rate of return is based on age and gender at purchase, payments are made until death.

What are annuity contracts?

Financial contract for regular income.

Can a lifetime annuity be cashed out?

Lifetime annuities can only be cashed out in limited circumstances, usually involving a policy surrender or annuitization.

What is a guaranteed term annuity?

A guaranteed term annuity is a contract that provides fixed payments over some time, usually until death.

How does the lifetime income strategy work?

The lifetime income strategy is a retirement plan that combines investments and annuities to create regular, guaranteed payments for life.

What happens to a lifetime annuity when you die?

In a basic life annuity, payments stop upon the holder’s death and leftover funds stay with the insurer. Alternatively, joint-and-survivor or life-with-period-certain annuities extend payments to a surviving spouse or for a set period. For deferred annuities with guaranteed income riders, remaining balances are given as a lump sum to beneficiaries.

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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