A lifetime annuity is a retirement investment plan that provides you with a lifelong monthly income once you reach the age of 59½. Lifetime annuities can be purchased as fixed, variable, or immediate annuities.
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When buying a lifetime annuity you can add a term rider to it or purchase a joint-life policy. Understanding the differences in the payout options and in the survivorship rights may make a difference in your decision to purchase a lifetime annuity.
If you are married and you are considering buying a lifetime annuity then it is a good idea to buy a joint-life annuity. The calculations will differ somewhat and the payout will be at a lower monthly income amount, but a joint-life annuity assures the surviving spouse to continue to receive an annuity payout until death.
Lifetime Annuities: Fixed, Variable, or Immediate
Fixed annuities are the lowest risk option available for most people who are considering the purchase of an annuity. With a fixed lifetime annuity you are getting a guaranteed fixed amount of money every month until you die.
The amount of your payout will not be calculated until you are ready to start withdrawing funds from your annuity. The reason the amount cannot be determined ahead of time is because part of the calculation takes your life expectancy into consideration. Once you decide to retire and start collecting on your annuity, the insurance company will determine how much money your monthly income should be. See the section below entitled, “Lifetime Annuities: Calculating Income.”
If you have a higher risk threshold, then you may want to purchase a variable lifetime annuity. This type of lifetime annuity is similar to the fixed one with the exception that your monthly income varies with the market rates. This means that some months your income may be really good and other months it may be rather small.
Both fixed annuities and variable annuities are typically purchased over the course of time. Immediate annuities, on the other hand, are purchased upfront with a lump sum. Immediate annuities are paid for in full with the expectation that monthly income payouts begin almost immediately.
The reason to buy an immediate annuity and draw a monthly income instead of just keeping the money and paying yourself is mainly for the very conservative growth rate and the peace of mind knowing you will have a steady income for the remainder of your life. Earnings from annuities can range from as little as 3% to as much as 7%. Compared to a savings account in the current economy where 1% is high, this is a promising rate of return.
The biggest drawback to an immediate annuity is that you are unable to withdraw funds or request an early surrender regardless of your circumstances. Once you buy an immediate annuity your money is given to the insurance company and the only money you will ever collect back from the insurance company is the expected monthly payout.
Lifetime Annuities: Calculating Income
In order to calculate the income of an annuitant (annuity owner), the insurance company must take several things into consideration. Your age and gender will weigh heavily in the decision making process.
Annuities are owned by insurance companies, who are trained professionals in gauging mortality trends. Therefore, when you decide to retire and cash in on your annuity by collecting monthly payments, the insurance company will decide how much your monthly payout will be based on your expected remaining lifetime.
The cost of the annuity (how much you paid directly into it) has to get added to the estimated rate of your return. Your age and gender will then help determine your life expectancy and your monthly payment will be calculated accordingly.
The reason an insurance company sells annuities is to make money. In cases where an annuitant dies prematurely, the insurance company benefits. If the annuitant lives longer than expected, then the insurance company takes a loss. In typical situations, it’s an even blend that keeps the insurance company in business.
Lifetime Annuities: Rights of Survivorship
When it comes to annuities and rights of survivorship, it is important to understand that typically there is no beneficiary to an annuity. If you die, then the insurance company simply keeps all of the benefits that have not yet been paid out.
Some variable annuities allow for the selection of a beneficiary and other lifetime annuities allow for a term rider that guarantees payout to a beneficiary for a certain length of time if the annuitant dies prematurely. Your monthly payment will be less with this type of term agreement, but your dependents will get to benefit from your annuity if you die before the selected term is over.
If you are married, you need a joint-life annuity so that no matter which spouse dies first, the surviving spouse will continue to receive the monthly payout for the rest of his or her life. Again, the monthly payouts will be calculated to take this into consideration so, your income will be less than if you were the only annuitant. However, the overall benefit of extending the payout to your spouse makes it worthwhile.
Lifetime annuities can round out a retirement investment plan by providing you with a guaranteed income for the remainder of your life. However, lifetime annuities are not for everyone. Compare annuity rates from different life insurance companies by entering your zip code!