Life Annuity

An annuity that makes a guaranteed fixed payment for the rest of the life of the annuitant. After the annuitant dies, the beneficiaries receive no further payments.
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Definition

Life Annuity: A life annuity is an insurance product that provides a guaranteed, fixed periodic payment to an individual (the annuitant) for the remainder of their life. Upon the annuitant’s death, the payments cease and no further amounts are payable to beneficiaries.

Examples

  1. Single Life Annuity: John purchases a single life annuity at age 65, ensuring he receives a monthly payment of $1000 for the rest of his life. If John passes away at age 85, the payments stop and his beneficiaries receive nothing further.
  2. Joint Life Annuity: Mary and her husband buy a joint life annuity that pays them $800 monthly. The payment continues throughout their lives and only stops after the death of the second spouse.
  3. Life Annuity with Period Certain: Jane buys a life annuity with a 10-year certain period, meaning she will receive payments for life, but if she passes away within 10 years, her beneficiaries will continue to receive payments until the end of that 10 years.

Frequently Asked Questions (FAQs)

Q1: What happens to the payments from a life annuity after the annuitant dies?

  • A1: The payments cease immediately upon the death of the annuitant, and no further payments are made to beneficiaries unless the annuity has a guaranteed period certain.

Q2: Can I outlive my life annuity?

  • A2: No, a life annuity is designed to provide payments for the lifetime of the annuitant, ensuring you cannot outlive the income stream.

Q3: Are there tax implications for life annuities?

  • A3: Yes, payments from a life annuity may be subject to income tax, depending on the source of the funds used to purchase it, as well as the tax status of the annuitant.

Q4: Is the payment amount from a life annuity fixed?

  • A4: Typically, yes, the payment amount in a standard life annuity is fixed. However, there are variable and indexed annuities that adjust based on market performance or inflation.

Q5: Can I surrender a life annuity?

  • A5: Generally, life annuities do not allow surrender; they are meant to provide lifelong fixed income. However, specific contract details may vary.
  • Annuity: A financial product that provides a series of payments made at equal intervals.
  • Joint and Survivor Annuity: An annuity that makes payments for the lives of two persons and continues until both have died.
  • Period Certain Annuity: An annuity that guarantees payments for a specific period, regardless of whether the annuitant is alive during that period.

Online References

Suggested Books for Further Studies

  • “The New Financial Order: Risk in the 21st Century” by Robert J. Shiller
  • “Retirement Income Planning: The Baby Boomers 2016 Guide to Maximize Your Income and Make it Last” by Mark J. Orr CFP
  • “The Oxford Handbook of Pensions and Retirement Income” by Gordon L. Clark, Alicia H. Munnell, and J. Michael Orszag

Fundamentals of Life Annuity: Insurance Basics Quiz

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