Life Annuity

Before annuities became a type of investment a couple of centuries ago, the word "annuity" merely referred to income payments to be made throughout the duration of the recipient's lifetime. A traditional annuity was know to be an indefinite stream of levelled income payments, though the terms of such arrangements have since changed and evolved, leading to the creation of what is called a "life annuity" today.

It was all the way back in the 1800's that insurance companies first began creating contracts outlining lifetime annuity payments to be made based on a total sum initially invested by the payee. It wasn't too long before the definition of "annuity" was better known as the actual contract made between the insurance company and the payee, and not the type of payment structure on which the contract is based. As annuities continued to gain popularity, the original type of annuity contract was renamed to the "life annuity" to avoid confusing this basic investment with newer versions of annuities such as those featuring death benefits or deferred payments.

The way a life annuity plan works is the annuity holder invests a certain sum into an insurance company in return for consistent and level payouts for the remainder of their lifetime. The most common way to do this is through the purchase of a fixed annuity. When the annuity holder dies, the fixed annuity contract automatically expires and, in a classic life annuity plan, any funds that were not distributed to the payee will be reverted to the insurance company.

Considering the annuity is geared to continue for the payee's entire life, the insurance company can make considerable gains should the payee experience an early death. On the other hand, there is also the risk of big losses should the annuity holder live far beyond what is expected. The gains and losses, according to probability, will eventually cancel each other out; however, keeping this balance requires advanced technology and frequent actuarial updates.

There are now many different versions of the life annuity that are more commonly used than the basic model; especially those with death benefits. In these plans, the annuity holder is allowed to designate one or more beneficiaries to any remaining payments, or at least a minimum amount of undistributed premiums, following their death. In a period-certain annuity, the beneficiary will receive benefit payments made by the holder over a specified time period in the event of their death. You can easily increase the death benefit of your plan, though it of course means your annuity expenses will increase as well.

There are also annuities made for multiple plan holders called joint-and-life annuities and joint-and-survivors annuities. In a joint-and-life annuity, payments are made until the first death among the annuitants; with the joint-and-survivors annuity, payments continue to be made until both annuitants have passed away. Impaired life annuities are ideal for those with low life expectancies (for example, someone with a serious disease who is expected to live only 5-10 more years) as the payout is considerably higher than those with average life expectancies.

Personal security is usually the top priority for those purchasing a life annuity plan, which is why insurance companies invest their clients' capital into government and corporate securities that yield little return. As stipulated in any annuity contract, the insurance company has a responsibility of ensuring funds are available to make payments and therefore will always make safe investments in order to be able to fulfill its obligations. Of course, anyone has the option to invest funds into the stocks and bonds of their choice, though many prefer to go with an annuity because it ensures greater personal security and stability than other kinds of investments since the insurance company is obligated to fulfill the terms of the annuity contract.

The guaranteed security of having an annuity is a major reason why life annuities is often a preferred option among those preparing for retirement. A life annuity plan will ensure that some form of income will still be accessible once the holder is retired and no longer receiving any employment income. It comforts people to know that they will still be receiving a stable income after retirement as opposed to the potential risks and rewards of high-return type investments.

Annuities work in ways that motivate people to avoid withdrawal prior to retirement because, under the IRS code, 10% of the amount withdrawn will be deducted if you are younger than 59 and a half. Often, there are also surrender charges that will be deducted for making an early withdrawal, which is another incentive to leave the funds in the annuity until after you have retired.

There is also the option to purchase an immediate annuity, which begins payment distribution immediately upon being purchased. This is the perfect annuity for recently retired people who have a private savings to purchase an annuity. Immediate annuities are also commonly used by companies for their employees' pensions and employees themselves often also have the choice of annuitizing or switching their existing plan to an immediate annuity if they feel it better suits their situation. Governments are also known to provide private pensions by purchasing immediate life annuities to make up for unfunded retirement liabilities. It is very popular for retirees of countries with privatized retirement systems to purchase immediate life annuities.

Unlike an immediate annuity, a deferred annuity allows you to delay the commencement of payment distribution so that you may continue to contribute to the annuity and have it grow larger. A deferred annuity gives you the option to choose from fixed and variable types of investments, or you can opt to go with a combination of both. Regardless of whether you go with fixed or indexed deferred annuities, the principal amount invested remains protected. If you like the idea of having an indexed annuity over a fixed annuity, but don't want to defer payment, there are indexed immediate annuities available to which you make a single premium payment. In general, it really depends on the individual circumstances, income, assets, and personal needs to decide which life annuity is the best option.