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.
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