Pros and Cons of a Life Annuity

The term life annuity refers to an insurance product where the buyer, also referred to as the annuitant, is contracted to receive a set series of payments over an agreed upon period of time. This product is most often provided by a bank or other financial institution such as an insurance company. In most cases these payments will cease upon the death of the annuitant and the remainder of the fund will be forfeited. Sometimes there will be a co-beneficiary, such as the buyer’s spouse in many cases, who will also collect benefits in case of the annuitant’s death.A life annuity is often purchased in order to fund retirement or to provide for a surviving spouse after death and in some cases they are provided under a structured settlement awarded from a lawsuit for personal injury. Annuities will typically have two distinct phases. First there is the accumulation phase during which the buyer will make payments into an account in order to build up a sizable amount of money. After the contract is fulfilled, typically upon the death of the individual, the distribution phase begins and the beneficiary will begin collecting an agreed upon series of payments.Because there are so many different annuities available it can be difficult for the consumer to find the one that best suits their needs. To simplify matters, most of them can be classified as either fixed or variable. The fixed variation will pay in consistent increments and when there are changes in the amount it will be increased or decreased by a fixed percentage. In the alternative variable rate, payments are determined by the performance of certain investments, such as bonds or mutual funds. These are typically chosen when one is trying to defer the capital gains for tax purposes.In cases where the annuitant is not certain how much longer they may live and is concerned about passing on before they can earn back the base of their investment they may be interested in purchasing a guaranteed life annuity. These buyers obviously do not want to have to forfeit their investment, so they may be interested in signing this clause which requires them to make payments for a certain number of years, and if they pass on before this period is fulfilled then the estate or beneficiary is entitled to collect the remaining payments certain.The joint life annuity is another popular option that married couples will typically take advantage of. These are also referred to as joint and survivor annuities and their payments will continue until both spouses have become deceased, either in the same amount or at a reduced figure as defined in the contract. There are also single life annuities that are preferred for single individuals as they will receive payments only up unto their deaths, after which the rest of the fund is forfeited and no other beneficiaries are able to collect the remaining payments.Before you make any investment decisions that could affect your retirement fund, it is recommended that you first seek advice from a financial agent whom you trust.