How Lifetime Income Annuities Work

How Lifetime Income Annuities Work

As you make some plans for your retirement, you will quickly realize there are several different tools you can use to help ensure you have the money you need during retirement. One of the tools you can consider is a lifetime income annuity. But what are these, and how can you use these for your retirement?

A lifetime income annuity is an insurance product designed to provide the individual with an income throughout their retirement. Suppose you are about to retire or you have already reached retirement age. In that case, you may look into one of these lifetime income annuities to help you have a guaranteed source of income, even when you are no longer working.

These lifetime annuities come with many options based on the individual’s desire. The annuitant, or the person who purchases the annuity, can select how they want to be paid and how often. They can even pick out an inflation-protected policy, and some annuities are variable, allowing the interest rate to go up or down based on the current market rate.

To familiarize yourself with a lifetime income annuity, you may want some additional clarification about how these work and why you would choose this method of investing to have an income in later years. According to Forbes, annuity payouts are well worth it if you project a life of longevity. For example, if you live to age 75, you’d receive more money than if you live to age 65. Let’s dive in and learn more about the features of lifetime income annuities.

How Does a Lifetime Income Annuity Work?

We can compare life insurance and annuities to one another to better understand how these lifetime income annuities function. Annuities are bought from an insurance company using a lump sum of cash; in return, you can get regular payments each month, quarter, or year until you pass away. In some cases, the life insurance policy will allow your heirs to receive the remainder of your contract as a lump-sum payment if you pass away before the term ends.

The payment size you get will depend on a few variables. These can include how many payments you schedule to receive each year and the length of the payment period. Another factor is the interest rates, as the initial investment you spent when buying your annuity will accrue interest that can be added to your payments.

Like other insurance products you can purchase, annuities are like a wager between you and the insurance company. A lifetime annuity will be a bet between the insurer and you that you will not live longer than the term you settle on in the contract.

The insurance company will feel confident setting the terms because they have all the data at their disposal. They can use this data to help figure out how much to charge you and how much they will make out of the annuity. While a few people may outlive the terms, only some do.

Always read through the terms of your lifetime income annuity to make sure you understand how your particular annuity works. If you choose the right plan with a good insurance company backing it, you will find this is a great way to earn income in retirement.

How Much Will I Get from a Lifetime Annuity?

Each individual will differ based on age and how much they put into the annuity – the terms and length of the annuity will matter too. We can look at an example to help us out with understanding this concept.

Let’s say that we have a lifetime income estimate for a woman who is 67 years old and has $150,000 to invest. If this woman decides to get 12 monthly payments, it is possible to get $304 to $669 a month based on the current interest rates. Over 20 years, this will amount to her getting about $160,000, which is $10,000 more than the initial amount she put into the annuity.

The longer she lives past the age of 87, the more money this individual will get, and she will be able to continue getting those payments for the rest of her life.

How Much Does a Lifetime Income Annuity Cost?

When you get a lifetime income annuity, you will have to pay some fees for having the account. The insurance company will not invest and manage the money in the account for you for free. The amount that you pay, though, will depend on the insurance company you go with. However, it usually falls around 10%, depending on the insurance company you choose.

The more complex the annuity you decide to purchase, the more it will cost. Since an annuity is an insurance contract, you can also add some riders to them, increasing the overall cost. For example, you could add a long-term care insurance rider to cover the possibility you will need help with assisted living in the future.

What are Some Benefits of a Lifetime Income Annuity?

The most significant benefit to choosing to purchase your own lifetime annuity is that it protects you from longevity risk. The life expectancy in the United States has increased from 47 years in 1900 to 70 years today. And it is expected to go up even more to 85.6. A lifetime income annuity helps ensure you have that extra money when you get to your later years.

Lifetime annuities become even more valuable when you live beyond your life expectancy. It can also be set up to protect your savings against inflation, and bundling the annuity with other insurance types is possible. It would be best to compare the options to see which is best for you.

The Bottom Line

There are many reasons to choose a lifetime income annuity to help ensure you are prepared for retirement and can have a good income throughout those years. There are many to choose from, and you can pick based on the fees, the length of time you plan to have the annuity, and more. However, for best results, you need to take care to research in advance and choose the right annuity product for your needs.

Written by Joshua Galyon

Joshua is a senior editor at Snooth, covering most anything of interest in the world of science and technology. Having written on everything from the science of space exploration to advances in gene therapy, he has a real soft spot for big, complicated pieces that make for excellent weekend reads.

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