There is another type of personal pension that guarantees a steady income stream for life and it is known as Life Annuity. Like other insurance coverage, you must pay a premium for your annuity.
Actually, for a retiring worker, you can decide to use the annuity to get your mind off the excess spending or expenses you might incur when retired. Therefore, you can consider using an annuity as a second stream of income aside from your pension.
However, in exchange for these monthly payments, the annuity provider promises to pay you a specified amount of money while you are alive. Of course, It’s a guaranteed payment unless you decide to change some terms in your contract.
What is Life Annuity?
Basically, life annuity is a contract between two parties, the annuitant (the person who buys the annuity) and an insurance company, with a third-party financial institution.
Firstly, the annuitant pays an agreed-upon amount into the annuity, which is invested into a financial institution, and the annuity (insurance company) makes periodic payouts to the annuitant throughout his or her lifetime.
So, the contract allows you to receive payments from the insurance company for as long as you live.
Moreover, you can receive monthly or yearly payments, depending on how much you are willing to pay in premium. A lot of people use their annuities for retirement purposes and/or an income fallback.
Before you go for an annuity, you have to understand the way it works and the phases it must go through.
Phases of Annuity
To continue, annuities go through different stages before they become beneficial. Your insurance company makes sure you understand this process well enough before you start. These phases are
The Accumulation phase is the period that the annuitant makes regular contributions or payments toward their annuity.
The Annuitization phase is the period that you receive regular payments from the annuity. This period of payment and the size of the payment, however, differ from annuitant to annuitant. And it varies because of the value and the type of annuity as well.
Types of life annuities
To start with, annuities are categorized differently for different reasons. Insurance companies put these annuities in different categories. This is mostly dependent on how you want to be paid your annuity. Therefore, when you are set to buy an annuity, your insurance company helps you draw up a perfect type that will suit your payment. So, according to the category, types of annuities are:
Annuities based on pay-outs
When you use this type of annuity, your payouts will start exactly one year after the purchase of your annuity. Again, this type is mainly for the people ready for retirement.
Obviously, this is the opposite of the immediate type. Deferred annuity takes some time before you start receiving payments. This type of annuity allows you to make payments into your annuity, then you give it some time to grow in investments.
Annuity Based on growth
Fixed annuities are low-risk investments, and they pay out guaranteed rates of interest. This means that this fixed type will keep paying you a fixed amount according to the signed contract. However, with time, they can reshuffle the payment.
Furthermore, another type of this fixed income is called a fixed-period annuity. This payment comes in at a fixed date and runs for a period of 20 to 30 years.
There are many ways to invest money for retirement. One of the most common is via variable annuities.
Variable annuities are riskier bets since they invest in mutual funds, stocks, bonds, and other tax-deferred investment vehicles.
Because variable annuities offer the flexibility to invest in a wider variety of assets, they may be a good option for long-term investors who are looking for more variety in their portfolios.
Types of Variable Annuity
There are two main categories:
Deferred variable annuity is an account that you open with an insurance company. Typically, you deposit money (usually from monthly contributions) into an account, then, the insurance company invests the money for you.
You earn interest on the money, and typically, you can withdraw the money starting at a specified age.
For example, if you want to put away money for your child’s college education. This type of variable account can serve this purpose. But remember, you can lose your money because of the high-risk investments associated with variable annuities.
Single-Premium Immediate Annuities (SPIAs)
This type does not have the rule of accumulation. Your payouts begin exactly a year after buying the premium, just like immediate annuities. So, this can be beneficial to the retiring people and also the young people that inherited money.
Life insurance vs Life Annuities
Ever wondered about the difference between life insurance and life annuity, since they both pay out money to people.
Well, here are some facts that can give you a clear understanding.
An annuity is a contract between you and an insurance company. You pay a premium to the insurance company and the annuity company agrees to pay you a fixed amount of money periodically (or at a definite time) for the rest of your life.
Life insurance is yet another type of contract you go into with an insurance company. You pay a premium and the insurance company agrees to pay a beneficiary you selected a sum of money upon the event of your demise.
Therefore, the primary difference is that life insurance is for living individuals, whereas annuities are for investors. Life insurance pays beneficiaries upon the death of the insured.
Annuities, on the other hand, provide income and guaranteed payments for a set amount of time.
Unlike a life insurance policy, which provides a lump-sum payment upon the death of the insured.
Life Annuity is an agreement that provides for an assurance of income over an individual’s lifetime. It is also different from a retirement account, with which individuals can save and invest for retirement.
Life Annuity benefits
The major reason why people go for life annuity is because of the benefits it offers. When you look at it from all corners, you’d believe that life annuity in all build-up, is for the benefit of the annuitant.
Stream of steady income
For what it’s worth, one great benefit of an annuity is that it creates a second stream of income even while you are retired. What makes this benefit so great is that it pays you for the rest of your life.
While enjoying your retirement in front of a beach and soaking up the beauty, or sitting in your pouch with a cup of tea, you receive payments whenever it’s time, without hassles.
Annuity helps you save up. Here, you don’t worry about taxes because you just do not have to worry. You mostly contribute your share without any limits and look forward to your interests.
Then again, there’s another good part to this, you do not have to wait till you’re almost retired before you buy an annuity.
Life annuity Pros and Cons
Surely, life annuities are guaranteed sources of retirement income, but they come with various pros and cons.
Here are the main pros and cons of life annuities:
-Provide a guaranteed source of income in retirement
-Can help to hedge against inflation
-Can offer estate planning and legacy-building benefits
– Once you purchase a life annuity, you generally cannot get your money back
-There may be surrender charges if you cancel your policy early
-You may have to pay taxes on your annuity income later