What Is a Whole Life Annuity?
Let me explain what a whole life annuity is. It's a financial product from an insurance company that provides you with regular income for the rest of your life, starting at a specific age you agree on. You might hear it called a life annuity too. These are typically bought by people like you who want a reliable income in retirement. The payments can come monthly, quarterly, semi-annually, or annually—whatever fits your needs.
Key Takeaways
Annuities are insurance products that can pay out for a set time or for your lifetime, or even yours and your spouse's. A whole life annuity specifically pays you for as long as you live, kicking off at the contract's start age. You choose the payment frequency, from monthly to yearly. These can be fixed, giving steady amounts no matter what, or variable, where payments fluctuate with investment performance. With variable ones, you often get to pick from various funds for diversification.
How a Whole Life Annuity Works
Here's how it operates. Annuities can be set up for fixed periods like 20 years or for life, including for you and your spouse. Insurance companies use actuaries to crunch numbers on risks and set rates. You go through an accumulation period where you pay into the contract. Then comes the annuitization phase, where the company starts paying you back. At the end of any term, your account value turns into those ongoing payments.
Special Considerations
You should know annuities come as fixed or variable. Fixed ones give you consistent periodic payments. Variable annuities mean bigger payouts if investments do well, or smaller if they don't. Most variable options let you invest in things like stock mutual funds, offering less stability than fixed but potential for higher returns. There's no IRS limit on contributions, and earnings grow tax-deferred until you withdraw. But withdrawals of taxable parts are hit with ordinary income tax, and if you're under 59½, there's a 10% penalty. Sellers need a state life insurance license, and for variables, a securities license too—they earn commissions based on the contract value.
Example of a Whole Life Annuity
Take this example to see it in action. If you invest a $100,000 lump sum at 6% return over 20 years in a taxable account, it grows to $222,508. In a tax-deferred variable annuity with a 0.25% annual charge, pre-tax it's worth $305,053 at the end. Post-tax, assuming a lump-sum withdrawal with the same charge, it comes to $239,436. This shows how tax deferral can boost your value.
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