What Is a Life Annuity?
Let me explain what a life annuity really is. It's a financial product from an insurance company that gives you, the annuitant, a set amount of money periodically until you die. You usually pay into it over time while you're working, or you can buy it with one big lump-sum payment, often when you retire. People like you use these to ensure a steady retirement income that lasts as long as you do.
Key Takeaways
Here's what you need to know upfront. A life annuity is basically an insurance contract that pays you income until you pass away. You secure it by paying premiums or a lump sum. It's a common way to provide or boost your retirement funds. Most pay out monthly, but some do it quarterly, semi-annually, or annually.
How a Life Annuity Works
Understand that life annuities have two main phases. First, there's the accumulation phase, where you fund it with premiums or a lump sum. Then comes the income or annuitization phase, when the insurance company starts sending you regular payments.
Once it's all set up and active, you get those periodic payouts, creating a dependable income source. The company usually stops payments when you die or if some other event closes the annuity. But if you've added a rider or option, payments might continue to your estate or beneficiary.
Remember, since most life annuities end payments at your death, you should consider buying a rider if you want your beneficiary to keep getting money.
Most annuities pay monthly, but you might see quarterly, annual, or semi-annual options based on your needs or taxes. Many retirees set this up to cover ongoing costs like housing, health care, insurance, and medical bills.
One thing to note: while it guarantees income, a life annuity isn't adjusted for inflation, so your buying power could drop over time. And once you start it, you can't revoke it.
Special Considerations
Before you buy, talk to a reputable professional. Annuities are complex and can seriously affect your lifestyle.
Because of their tax benefits, wealthy investors or high earners use them to move large amounts of money or reduce tax burdens on income.
Beyond retirement, life annuities serve as payment methods in structured settlements or for lottery winners. If you win a lawsuit, you might get fixed regular payments. Lottery winners can choose an annuity over a lump sum, like 30 payments for Mega Millions—one immediate, then annual for 29 years.
What Is the Difference Between a Fixed Annuity and a Variable Annuity?
Let me break this down for you. A fixed annuity pays a set percentage or interest rate on what you've put in.
A variable annuity, on the other hand, bases payouts on how a group of investments performs. It can give higher returns when markets are up, but it's riskier—if markets drop, so does your value, unlike the steadier fixed type.
What Is a Joint Annuity?
A joint annuity keeps paying until both spouses die, often at a reduced rate after the first one passes.
What Is a Qualified Longevity Annuity Contract (QLAC)?
A QLAC is a deferred annuity you buy with funds from a qualified retirement plan or IRA. It gives monthly payments until death and skips IRS required minimum distribution rules. In 2024, you can use up to $200,000 for one.
The Bottom Line
To wrap this up, life annuities are insurance or investment products that deliver fixed payments at regular intervals. Sold by insurance companies and also called lifetime annuities, they act like insurance against outliving your savings—the risk shifts to the provider.
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