What is a life annuity?

Life Annuity

If you’ve started thinking about your retirement, you may be wondering how to prepare. And when it comes to retirement planning, you should look at all of your options to ensure that you get a good deal and a happy retirement.

Life annuities are a popular and frequently used method of ensuring that you have a guaranteed lifetime regular income, throughout your retirement, right up until the day you pass away.

But there are some considerable differences between a life annuity and a traditional pension plan that you should know about before you can decide what might be the right plan for you.

In this article, we’re going to talk about how a life annuity works, types of life annuities, who are life annuities for, how much is a life annuity, alternatives to life annuities, and then, by the end of the article, we can draw a conclusion about whether life annuities are a good idea (feel free to scroll down as needed).

Jargon Buster

Before we go into the nitty gritty, however, we need to explain some of the jargon:

• An annuitant is someone who has bought a life annuity.
• The principal is the amount of money used to buy the annuity.

How does a life annuity work?

So we’ll start with a recap at just what a life annuity is.

A life annuity is a contract with a life insurance company, that you can buy to ensure that you get a regular retirement income, not for a set period of time, but right up until your passing.

This life annuity is bought with a lump sum.

Life annuities are available at different levels, for example you could have an $50,000 life annuity or a $100,000 life annuity. The higher the investment in your life annuity, the larger the regular income you will receive from it.

The money you pay for into the life annuity is very carefully invested and is expected to grow in value, over your expected lifetime.

What are the different types of Life Annuity?

In addition to buying a single life annuity it is also possible for couples to take out a joint annuity.

A joint life annuity is one where the regular income payments are continued to the surviving spouse, after the other spouse has passed away.

These annuities are also referred to as Joint and last Survivor annuities.

With a joint life annuity, there are also provisions for making payments to a third party, if both of the annuitants die before the number of guaranteed monthly payments have been made.

Who are life annuities for?

Life annuities are for everybody and most financial advisors will advise you to apply for your life annuity after he or she has "shopped" the annuity market for you.

Benefits of a life annuity

The advantages of life annuities are very clear. You can receive a regular and stable income for the entire duration of your life rather than for a set period of time.

If you’re in good health, there’s no reason why you can’t live a long life for which you need a regular income.

Where a life annuity is different from a pension plan is that rather than there being a set percentage of income used, you can decide for yourself how big an annuity you want to buy.

Life annuities are a great way to supplement your income during your retirement, particularly if you do not have a particularly good pension income.

The particular advantage with joint life annuities is that the amount of money is determined by the income of two partners.

How much is a typical life annuity?

Different insurance companies offer different life annuity packages, which is the reason monthly payouts can vary.

If you have received a lump sum from your employer’s pension plan, then this is money that can go towards buying a registered life annuity.

Life insurance companies do not always publish the costs of their life annuities, but instead can be approached for a quote. This is usually done either online or over the phone by your annuity broker.

There are a number of different factors that can affect the cost of a life annuity. These include current interest rates, the size of your deposit and any options that you decide to add on. In addition, the older you are when you buy the annuity, the higher your annuity payments will be.

• Click Here To Find Out How Much An Annuity Will Cost

Alternatives to life annuities

The two main alternatives to life annuities are fixed term annuities and pension plans.

Fixed term annuities, as the name suggests, are only for a set length of time rather than for your lifetime. The most obvious benefits of this type of annuity is that you know when you can expect to receive the return of the principal.

Likewise, a traditional pension plan usually provides the owner with a regular income during retirement for the rest of your life.

In many ways a life annuity is very much a do-it-yourself pension plan, specifically designed to last as long as you need it.

Points to note

It’s worth noting at this point that you need to have a guaranteed period for payments in case you were to pass away earlier than anticipated.

Are life annuities a good idea?

With life expectancy on the increase, ensuring that you have good regular income right up until the day you pass away is hands down a very good idea. You don’t want your final years ruined by not having enough money to pay for all of your creature comforts.

Of course, what you’re really buying is a sense of security.

And if you are in any way concerned that a single life annuity for yourself may not necessarily be good value for money, then you might want to consider a joint life annuity, as mentioned above.

• Click Here To Find Out How Much An Annuity Will Cost