Why Would Someone Buy a Life Annuity?

Luciano Meirelles  Vov e Vov copy
Joint-Life annuities depend
on how long each spouse lives.
Photo by Luciano Meirelles

The biggest advantage of a life annuity? It takes the risk of longevity into account.

In terms of the benefit to the annuitant, a life annuity works the opposite way a life insurance contract does. A life insurance policy takes into account the risk of the insured prematurely passing away. The longer the insured lives, the lower the return on his investment becomes.

An annuity takes the opposite approach, it protects against the annuitant living a long life and thus, outliving their capital. A life annuity pays out for as long as the insured lives. For example, if the insured lives to 120 the annuity would pay out until age 120. With each year the annuitant lives, the better the return on his or her investment.

Life annuities can be set up as single annuities, which will just pay out for as long as the annuitant lives, or joint-life annuities, where the annuity will pay out as long as the annuitant and their spouse lives. Life
annuities can also come with a zero year guarantee period, or different minimum payment guarantees. These minimum payment guarantees work as a form of life insurance.

A life annuity with a zero year guarantee means that if the annuitant passes away, the annuity payment stops. For example, let’s assume the annuitant invests $100,000 into a life annuity with a zero year guarantee  and receives a monthly payment amount of $500.

If the annuitant passes away, the payments stop regardless of how early in the contract the death occurs. If the death occurs after 24 months, the payment would stop after those  24 months. As a result, the insured would’ve invested $100,000, but the insurance company would have only paid out $12,000.

However, a guarantee period stipulates that the insurance company will pay the amount for a specific
period of time — say, 15 years. So, in the above example, the annuitants beneficiary would have received the monthly benefit for the remaining 13 years.

Guarantee periods come at a price though, the longer the guarantee, the lower the payment the annuitant receives. The same thing can be said for Joint-Life Annuities. A joint annuity pays a lower monthly premium than a single-life annuity because the insurance company is guaranteeing that it will pay the annuity payment for as long as both spouses live. This can have a huge impact on the payment, especially when one spouse is significantly younger than the other.

Life annuities are a specialized market:  all life insurance brokers are licensed to sell this product, but very few are active, or have a keen understanding of how the different types annuities work. Also, getting a life
annuity quote is a more drawn out process for the broker than getting a regular life insurance quote.

But the brokers at LSM Insurance are not afraid. If you wish to receive a life annuities quote, give us a call at 1-866-899-4849.

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