A life annuity is a financial product that provides a regular income stream to an individual for the duration of their lifetime. It is a contract between an individual (the annuitant) and an insurance
company or other financial institution (the annuity provider). In exchange
for a lump sum payment or a series of premium payments, the annuity provider guarantees to pay the annuitant a fixed amount of money
at regular intervals, typically monthly, for as long as they live.
One key feature that distinguishes a life annuity from other types of annuities is the guarantee of lifetime income. Unlike other annuities that may have a fixed term or a predetermined payout period, a life annuity continues to pay out as long as the annuitant is alive. This provides a valuable element of longevity protection, ensuring that the annuitant will not outlive their income.
Another important distinction is the absence of investment risk
for the annuitant. With a life annuity, the annuity provider assumes the investment risk and manages the underlying investments to generate the necessary funds to meet the annuity payments. This relieves the annuitant from the burden of managing investments and shields them from potential market fluctuations or investment losses.
Life annuities can be further categorized into two main types: immediate and deferred annuities. Immediate life annuities are purchased with a lump sum payment and begin making regular income payments immediately, typically within one year of purchase. Deferred life annuities, on the other hand, are purchased with premium payments made over a specified period, and the income payments start at a later date, usually at retirement.
Additionally, life annuities can be structured as either fixed or variable annuities. Fixed life annuities provide a guaranteed income stream based on a predetermined interest
rate or payout formula. The income payments remain constant throughout the annuitant's lifetime, offering stability and predictability. In contrast, variable life annuities allow the annuitant to invest their premium payments in a selection of investment options, such as stocks or bonds. The income payments fluctuate based on the performance of the underlying investments, offering the potential for higher returns but also exposing the annuitant to investment risks.
In summary, a life annuity is a financial product that offers a guaranteed income stream for life in exchange for a lump sum or periodic premium payments. It differs from other types of annuities by providing lifetime income, relieving the annuitant from investment risk, and offering flexibility in terms of immediate or deferred start dates and fixed or variable payment structures. Life annuities serve as an important tool for individuals seeking to secure a stable and reliable income during their retirement years.