What a Lifetime Annuity Is and How It Works

A lifetime annuity can serve as a happy medium, giving you a guaranteed monthly payout after you retire in exchange for paying premiums while you’re working.

Stephanie Faris

Published December 18th, 2020

Table of Contents

Key Takeaways
  • A lifetime annuity is an investment vehicle where you pay premiums each month, similar to a life insurance policy.
  • But unlike a life insurance policy, an annuity pays you monthly income at a future point that is determined at the time you sign.
  • If you plan to go with an annuity, it’s important to shop around and do your research.

You want to save for retirement, but you don’t want to risk losing your money. But the return you can get from “safer” options like a savings or money market account can be unappealing.

A lifetime annuity can serve as a happy medium, giving you a guaranteed monthly payout after you retire in exchange for paying premiums while you’re working. But if, like many, you’re wondering how does an annuity work, you may need to do some research before buying one.

What a Lifetime Annuity?

A lifetime annuity is a type of investment that’s sometimes misclassified as a type of insurance. An annuity pays you income later in exchange for making regular payments now. It’s often seen as a way to guarantee income after retirement.

If you purchase a lifetime annuity today, while you’re still working, you’ll pay into the policy for a specific period of time, known as the term. Typically at a preapproved point, you’ll stop making payments and begin receiving income. The premium-payment phase of an annuity is called the accumulation phase, while the second phase is known as the distribution phase.

You may be asking what is a life annuity because you’re considering purchasing one. If so, be very cautious about the company selling it to you. Annuity fraud has become prevalent. You should also read the fine print and compare what you’re getting to other options. Annuities are contracts that can carry additional fees and penalties depending on the annuity’s contractual terms. It’s crucial to compare the reputation of the annuity company as well as the fees and the returns you’ll get to what you’d see if you invested the funds.

How to Calculate Your Lifetime Annuity

If you’re considering a lifetime income annuity, you’ll need to know which one to choose and how much to pay into it. You can find plenty of lifetime annuity calculators online, but understanding how to make the calculations manually can help you see how one annuity stacks up against another.

To calculate the life income annuity gather the following information:

  • The starting balance of the annuity
  • How much you’ll be contributing to the annuity each year
  • The number of years you’ll be paying into the annuity
  • The interest rate you’re being offered

Using this information, you can determine how much you’ll have in the annuity at Year One, Year Two, Year Three, and so on. Add on the interest you’ll earn along the way and you can get a rough estimate of how much you’ll have at retirement.

Costs Associated with Lifetime Annuities

Anytime you’re considering what is lifetime income, there are likely taxes involved. There are other fees, as well. You’ll need to subtract these costs from any earnings you calculated in the previous step.

  • Commissions. That person touting the benefits of a guaranteed lifetime annuity has some skin in the game. You’ll pay this person a cut of your principal when you purchase the policy.
  • Management fees. These include underwriting costs and other fees associated with managing your policy and the money in it.
  • Taxes. As with any income, the money you earn in your annuity will be taxed when you take it out. Assuming you’ve already paid taxes on the money you put into the fund, you’ll only pay taxes on the interest you earn.

Lifetime Annuity Benefits

If you’re weighing a life only annuity against another investment type, such as playing the stock market or putting money into an IRA, it’s important to note a few benefits of a lifetime annuity. One of the biggest is reduced risk. The company that sold you the annuity will be obligated to make your payments no matter what happens with the stock market.

Another benefit of a guaranteed life annuity is the flexibility in the terms. You can insist on a policy that pays you for a fixed number of years even after you die, for instance. The payment would go to your designated beneficiary. You can also require that your policy issuer promise in the contract that your distributions will be adjusted for inflation.

Lastly, there’s the general reliability of the setup. When you look at annuity for life meaning, there’s some peace of mind that comes from knowing you’ll be paid a fixed monthly rate. Even if you invest and save, you’ll have to gradually dole the money out and hope it will last. An annuity gives you reliable monthly income.

Final Thoughts

A lifetime annuity incorporated into a well rounded retirement plan can be a valuable source of safe retirement income. If you’re thinking about an annuity, we recommend going through all of your options with a Certified Financial Planner®. If an annuity is a good option for you, an advisor can help you decide how much to put into the annuity based on your personal circumstances to get the results you want.

Author

Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.