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Life Annuity

Life Annuity

Life annuity and annuity are plans by means of which an annuitant pays a lump sum amount of money invested by an annuity company and the payments are paid back to the annuitant over a period of time. Life annuity is generally bought by retirees to increase annual income as well as gain returns on his investments without headache of managing them.

How Life Annuity Works

Annuitants are considered as loans in reverse where the annuitant pays a lump sum of money to an annuity company and the company returns back the loan with interest over time.

In life annuities plans, the annuitant pays a lump sum and then gets yearly payments over a set amount of time during his life. Annuities are created to provide a pre-decided annual income to the life-annuitant, once the annuity is established. An annuitant can either pay into an annuity-fund during his working years or pay a large amount of money from his previously built account; once he is closer to retirement.

Once bought, costs of life annuity plans are used to buy bonds, stocks as well as other investments that provide higher returns. The accumulated interests are used to provide support the life annuities payments. Life annuity interests (interests accumulated on amount invested in a life annuity) is tax-exempted till payments on the annuity get paid back to the annuitant. Investments are taxed after withdrawal period initializes.

Life annuity companies have plans having set payment that ends as soon as the annuitant dies. No payment is made to beneficiaries and remaining investments are kept by the company. Life annuity payment is calculated on the basis of average lifetime of the individual. If the individual lives more than the calculated time, he may get more money than he has paid for the plan. However, there are riders that may be added to life-annuity plans.

Typical life annuity plan pays the annuitant until his death, but there are riders too that can be attached to contract assuring other to receive annuities. The options are:

  • Installment - Refund - It guarantees payment of the remaining investments to the beneficiaries after death of the annuitant.
  • Life with Certain Period - It assures payment to the annuitant till death. However, if the annuitant dies before set time, the beneficiaries will be paid through a pre-decided time.
  • Joint and Survivor - In case of spouses, annuity pays out after death of annuitant. The annuity will be paid to surviving spouse till death.

Life annuity plans are varying. Initial payments, total costs of annuity and the amount paid out also vary over time. Yearly payments paid back to annuitant may vary in both sum of money and frequency (number of payments over a given amount of time). People can choose on how much would be paid each time or frequency of payments. Usually they can't select both. Once the option is chosen, can't be altered. Size of the payments depends on:

  • Whether there is minimum required payment
  • Total sum of money in the contract
  • Life anticipation of the annuitant

Payment options into a life-annuity are:

  • Flexible-Premium Annuity - Purchase of a life-annuity is done through a series of payments
  • Single-Premium Annuity - Purchase of annuities with one large sum

Payment to the annuitant includes:

  • Deferred Annuity - Payment to the annuitant starts many years after the annuity-contract begins. This is best for individuals who wish extending their income far beyond retirement.
  • Immediate Annuity - Initializes payment to the annuitant just after purchase of annuity-contract.
  • Variable Annuity - It assures no fixed interest rate and has more risk in investment with annuity fund.
  • Fixed Annuities - The annuity company puts funds into investment and guarantees a certain interest rate over a certain period of time (from months to years).

Frequency of payment and amount of payment each time also vary. The options are:

  • Fixed Period - Gives the annuitant fixed income over time chosen by the annuitant. Longer the period, the less payment each period of time.
  • Fixed Amount - Gives the annuitant a fixed income per month selected by the individual. The payment is fixed till the annuity ends.

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