The term “Life Annuity” is rather generic and can have multiple meanings but it is almost always used when describing lifetime income from an annuity product. This post provides detail on the most common uses of the term and provide detail on how a lifetime income annuity works.
First meaning of the term “Life Annuity” = Annuity with a lifetime income rider: There are a number of companies that offer income riders that can be added to their annuity products. The income rider is a way to guarantee a lifetime income stream off of you investment for life. The riders usually provide for a substantial bonus on your money up front (approx. 2% to 10% depending on product) and will increase every year at a set compound interest rate (Going rate is 4% to 8% per year). Money in the product is guaranteed to increase at the specified rate for up to a specific number of years. Many companies cap the growth and 10, 15 or 20 years.
The point of the income rider is that it allows the investor to calculate exactly how much income they will be able to draw in future years. Once they decide to turn income on, it will pay out for the rest of their lives or if they have a spouse, it will pay out until both pass away. Income riders have become hugely popular in the last 10 years due to the perceived unpredictability of the stock market. Income riders can usually be added to fixed, fixed indexed or Variable annuities. The purchaser should know that the income rider guarantees the income only. It does not guarantee growth of the actual lump sum investment.
The second meaning of the term “Life Annuity” is usually associated with a Deferred Annuity or sometimes called “Longevity Insurance”. This is also an annuity but it functions in a different manner. The Deferred Annuity takes a lump sum payment and pays out a guaranteed future in come at a predetermined future date. The insured will usually not have access to the money prior to the payout starting which makes the Deferred Annuity less flexible than an income rider product.
The bottom line with lifetime income products is to find the companies that will pay out the most guaranteed future income. It is very easy to compare these products if you compare them fairly. For example. A 55 year old female wants to use $250,000 to create future lifetime income when she turns 65. She needs to find the company that will pay out the most to her per month in 10 years. Companies will try to say add “bells and whistles” to products to keep people from making this most simple of comparisons but if income is true need, there is no reason to look at anything else.
WANT TO LEARN MORE ABOUT FIA’s? REGISTER FOR OUR WEBINAR “CHOOSING THE RIGHT ANNUITY” CLICK HERE