A life annuity is a financial arrangement that allows a life insurance company to provide a series of future payments to an annuitant for a certain sum of money. The payment stream based upon the life expectancy of the annuitant is of unknown length but generally guaranteed to continue for a certain number of years.
Also it is possible to have a joint contract so that the payments stop upon the death of the second of two annuitants ( i.e., a joint and last survivor life annuity).
A life annuity can negatively affect an annuitant who dies before recovering his or investment. Such a situation is rememdied or offset, by the increase in income not otherwise available and the normally favorable tax consequences. Thus each annuitant must decide whether to sacrifice use of the money in favour of a greater return. If you need a greater guaranteed income then that is what a life annuity is designed to do.
Life Annuity Facts
A life annuity has a pro and con reputation from both the annuitant’s and the issuer’s viewpoint. Who need income or are financially unskilled. Yet, the annuity is an important financial tool for those.
Potential life annuitants are familiar with the ideas involved with life annuities through knowledge of their own pension plan from a business or government position. Most people believe that the odds are stacked in favor of the issuer, though issuers have grappled with the risk these policies bring.
Life Annuities Cost
From the issuer’s viewpoint, there are many technical factors that determine the cost of an annuity payment from the life expectancy of the annuitant and the yields on investments made. There are expenses (including distribution costs) related to managing the money and risk management cost for the issuer which can balloon if annuitant’s returns are higher.
So Should I Be Looking At A Life Annuity
You should be looking at a life annuity if your age and the prevailing long long term interest rates will guarantee you a superior after tax return. You may be able to generate more income if you actively manage your income but this takes time and expertise. Or perhaps you are just fed up with worrying about the net return and want a life annuity to provide you with a guaranteed income.
There is no easy answer to this life annuity question as we all differ. And often, if there is a large age difference in a marriage, points of view can be very different.
Overall it is necessary to consider all the alternative such as bonds or fixed interest rate deposite along with a life annuity.