The current market situation has left many Americans shaken to the core. The stock markets have been volatile for quite a few years now. Similarly, the bankruptcy of high-profile companies has meant that many small time investors are wary of putting their hard-earned money in company stocks.
Even money market funds and CDs have ceased to be attractive as they are continuously lowering the interest rates.
Under such circumstances, many investors are making a beeline for annuities. Annuity is one of the oldest investment products in the world. The origin of annuities can be traced back to the Roman Empire when citizens used to pay a one-time payment known as annua, which in turn entitled them to receive a fixed yearly amount.
Annuity is a contract between an individual and an insurance company, wherein the insurance company provides a regular stream of income in lieu of a premium or a series of premiums paid by the individual.
Realizing the varied needs of investors, insurance companies have come out with a variety of annuities. Fixed annuity, variable annuity, lifetime annuity, equity-indexed annuity are some of the popular offerings from insurance companies.
Lifetime annuity is a contract wherein the insurance company pays an income to the annuitant till his survival. In other words, the annuitant receives an income for a lifetime.
Features of life annuity:
- Lifetime annuities offer an income for a life. The insurance company is bound to pay the annuitant an income for a lifetime, even after the contributions paid by the annuitant is exhausted. At a time, when the life expectancy of the average American is increasing, experts term investment in lifetime annuities as a prudent decision.
- The amount payable to an annuitant is influenced by several factors including
age, gender, health condition, prevailing interest rate scenario, premium amount, and the number of lives covered i.e. 1 or 2. In fact, some insurance companies offer a higher rate of return to annuitants suffering serious health problems. This is because a person with a health problem is assumed to have a shorter life expectancy than a healthy individual.
- Lifetime annuities are tax deferred. Hence, you are not liable to pay taxes on the interest earned by your annuity. This allows you to take benefit of compound growth, as you are able to earn interest on the money that you would have otherwise paid as taxes. However, you are liable to pay taxes once you start receiving the income. Since, most annuitants retire by the time they start receiving payments from their lifetime annuity, they are subject to a lower tax rate.
- The payment from lifetime annuity ceases upon the death of the annuitant. However, some insurance companies have come out with plans that allow your spouse or beneficiaries to receive income even after your death. For instance, if you opt for a joint lifetime annuity, your spouse will continue to receive an income even after your death. However, the income received in case of a joint lifetime annuity will be lower than that earned in case of a single life option.
- Some insurance companies also allow the heirs to receive the payment in case of an early death of the annuitant. However, most insurance companies only pay the difference between the premiums paid by the annuitant and the amount received from the lifetime annuity policy.
Thus, lifetime annuity policy is an ideal investment for those who are interested in receiving an income for a lifetime and in the process, avoid the fear of outliving their savings.