Definition and Meaning
Life Annuity: An insurance product that provides the insured with a guaranteed stream of regular income payments for the remainder of their life. This ensures a continuous and predictable source of income, effectively eliminating the risk of outliving one’s financial resources.
Etymology
The term “annuity” comes from the Latin word “annuus” which means “yearly”, and the form of “annus” which signifies “year”. Together they indicate financial products designed to provide yearly or periodic payments.
Background
Life annuities have a long history tracing back to ancient Rome, where Senators were often paid with lifetime incomes. In modern times, they have evolved into a crucial retirement planning tool, especially as lifespan increases and people seek to ensure they don’t outlive their savings.
Key Takeaways
- Guaranteed Lifelong Income: Ensures the insured receives payments for as long as they live.
- Regular Payments: Payments can be structured monthly, quarterly, or annually.
- Customization: Various options available regarding payment schedules and features, such as survivor benefits.
- Protection Against Longevity Risk: Mitigates the risk of outliving your financial resources.
Differences and Similarities
Differences
- Life Annuity vs. Term Annuity: Unlike term annuities, which provide payments for a specific period, life annuities continue for the insurer’s lifespan.
- Life Annuity vs. Pension: Pension plans are employer-sponsored, while life annuities can be purchased individually from insurance companies.
Similarities
- Income Generation: Both annuities and pensions aim at providing a steady income, especially post-retirement.
Synonyms and Antonyms
Synonyms
- Lifetime Annuity
- Immediate Annuity (if payments start immediately after purchase)
Antonyms
- Term Annuity
- Lump-Sum Payment
Related Terms with Definitions
- Deferred Annuity: An annuity that delays the start of payments until a future date.
- Fixed Annuity: Provides regular, guaranteed payments.
- Variable Annuity: Payments fluctuate based on the performance of investments inside the annuity.
Frequently Asked Questions
What happens if the insured dies shortly after starting the annuity?
If a life annuity with a guaranteed period or survivor benefit was chosen, payments may continue to the designated beneficiary. If not, payments typically cease upon the annuitant’s death.
Can payments from a life annuity be adjusted for inflation?
Yes, specific life annuities come with inflation protection features to ensure the payments retain their purchasing power over time.
Is the income from a life annuity taxable?
The taxation of annuity income depends on the source of the funds used to buy the annuity. Generally, a portion of each payment representing the return of principal is tax-free, while the interest earned will be taxable.
Exciting Facts
- First Modern Life Annuities: Issued by the township of Leiden in the Netherlands in 1654.
- Nobel Laureate Pensions: Many institutions award life annuities as part of laureate benefits.
- Increasing Popularity: The demand for life annuities increases among risk-averse retirees seeking stable income.
Quotations from Notable Writers
“A good plan violently executed now is better than a perfect plan executed next week.” – George S. Patton
Related Government Regulations
- Individual Retirement Annuities: Governed in the U.S. by IRS regulations.
- Solvency and Capital Requirements: Insurance companies offering annuities must comply with state solvency standards under the National Association of Insurance Commissioners (NAIC).
Suggested Literature for Further Studies
- “Annuities for Dummies” by Kerry Pechter
- “The New Life Annuity: Managing Retirement Income and Expectations” by Moshe A. Milevsky
- “The Annuity Handbook: Everything You Need to Know About Annuities” by A. M. Best Company
Quizzes! 🤓
In parting, dear reader, remember: while life’s only certainties may be death and taxes, life annuities do make one of them a bit more predictable. Happy annuity planning!
– Jennifer Iverson, “Insurance Terms Lexicon”, October 11, 2023
