Lifetime payout annuities, also known as lifetime income annuities, are an investment option designed to provide a steady income stream throughout the life of the investor, or the annuitant. These annuities act as a financial safety net, particularly for retirees, ensuring that they never fully exhaust their savings.
The Importance of Annuities
With advancements in medical science extending lifespans, financial security in old age has become paramount. Surveys have indicated that outliving savings is a top concern for many elderly individuals, surpassing even health-related fears. Hence, life insurance companies developed annuities, a form of longevity insurance, to mitigate these fears.
How Lifetime Payout Annuities Work
An individual can acquire a lifetime payout annuity by making a single lump-sum payment or through periodic contributions in the years leading to retirement. This initial investment forms the principal amount for the annuity.
Upon the annuitant's decision to start receiving payments or upon reaching a predetermined age, the annuity begins paying out. These payouts, often competitive with other retirement income sources, are derived from the principal amount and typically range between 6% and 10% per year. Importantly, these payments continue for as long as the annuitant lives, thus offering a form of guaranteed income.
Types of Annuities
There are different variants of annuities, such as variable and indexed annuities, which can be partially or wholly transformed into lifetime income at the discretion of the owner. These allow the owner to enjoy varying degrees of potential market-based returns while still having the security of lifetime income.
Ensuring Future Security
Lifetime payout annuities offer more than just a guaranteed income. Many annuity contracts also provide death benefits and allowances for long-term care needs, sometimes exceeding the initial investment. If an annuitant passes away before receiving the full principal amount, the remaining balance is usually transferred to beneficiaries, except in cases where a "life only" option is selected.
In addition, there are "years certain" options, which guarantee a fixed income for a set number of years, regardless of whether the annuitant lives through the duration.
A lifetime payout annuity is a viable investment for those seeking a reliable income stream during retirement. It offers a guarantee of financial sustenance, even in the face of increasing lifespans and rising costs of living. By considering various factors such as age, financial goals, and risk tolerance, individuals can determine the type of annuity and payout schedule that best suits their needs, thus securing their financial future.
Summary
Lifetime income annuities provide a guaranteed payout over the life of the annuitant. “Payout” is not a term used officially, but it denotes that the principal amount invested in the annuity is designed to be paid out and depleted over the life expectancy of the annuitant. The payout rate is competitive with other sources of retirement income.
Life insurance companies created annuity products as a way to guarantee a client never runs completely out of money. Statistically, according to some surveys, elderly people are more afraid of outliving their money than of nearly anything else. Today medicine can keep people alive longer and longer but not functioning at full capacity, and certainly not able to generate more income in most cases.
Annuities are a kind of longevity insurance. A person can purchase an annuity with a lump sum or, in some cases, can pay into it in the years leading up to it. There are also different kinds of annuities, such as variable annuities and indexed annuities, that can be partially or fully converted to lifetime income at the discretion of the owner.
The payout rate usually depends solely on the age of the annuitant and the amount being used to purchase the income stream. The payout will be competitive with other options for income in the market, and might be anywhere from 6% to around 10%, which is the amount paid out of the principal amount per year, and the insurance company guarantees that the payments will never run out as long as the annuitant, or either of two joint-annuitants, is alive.
Some also provide for death benefits and benefits for long term care needs that might be significantly larger than the amount invested. If an annuitant dies before all of the principal has been paid out, usually the remainder will be paid to beneficiaries, unless the annuitant selected a “life only” option.
There are also “years certain” options which guarantee that income lasts for at least a set number of years, even if the annuitant dies before the years certain are passed.
What is the “Joint and Survivor” Option?
What are the Basics of Annuities?
What are the Different Types of Annuities?