What Is a Whole Life Annuity Due?
Let me explain what a whole life annuity due really is. It's a financial product from insurance companies where payments to you start right at the beginning of each monthly, quarterly, or annual period, not at the end like some other annuities. This setup guarantees you payments for as long as you live during the distribution phase. Once you pass away, the insurance company keeps whatever funds are left.
You might buy an annuity if you're looking to lock in income for retirement. There's an accumulation phase where you pay into the contract with the insurer, and then the liquidation phase kicks in, where they pay you back.
Key Takeaways
Here's what you need to grasp: A whole life annuity due is an insurance product that delivers payments monthly, quarterly, semi-annually, or annually for your entire life, starting at a specific age. These payments continue only while you're alive; the annuity ends when you die. Remember, an annuity due means the payment is due immediately at the start of each period.
Understanding Whole Life Annuity Due
Annuities fit into retirement plans to provide steady income in your later years. You make payments into the annuity, and once it annuitizes, you get regular payouts. These can be set for a fixed time like 20 years or for your lifetime and possibly your spouse's.
Actuaries at insurance companies use math and stats to figure out risks and set policies and rates. With an annuity due, payments happen at the beginning of the period, not the end. For you as the recipient, these payments are an asset. For the payer, it's a debt they have to settle periodically.
Important Note on Taxes
Keep this in mind: Income from an annuity gets taxed as ordinary income, unless you've got it in a Roth IRA.
Periodic or Lump Sums
You face a big choice with annuities: go for periodic payments or take a lump sum. This brings in the time value of money—money now is worth more than money later, or the reverse, future money is worth less today.
If you get a $100,000 lump sum today, compare that to a stream of payments over years. It depends on the implied interest or discount rate, how you might invest the lump sum with its risks and returns, and if you need cash right away.
Lump sums carry risks—if you invest aggressively, you might beat the periodic payments, or you could lose everything if markets tank. You might spend it all too quickly, leaving nothing. That's why many choose periodic payments. Plus, each option has its own tax effects.
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