Life Annuity

Life Annuity Definition

A life annuity is a financial investment contract purchased through an insurance company. In the contract, the investor or buyer agrees to make payments over a period of time into the annuity in exchange for either a lump sum or installment payments over the remainder of the investor’s life. Annuities that pay out in a lump sum at the end of the accumulation period are called single-payment annuities while those which payout in installments are called regular payment annuities.

Life annuities are an investment contract that helps annuitants provide a more secure retirement for themselves and also provides more control over the structure of the retirement than other programs. In addition to being a retirement option, some life annuities come about as a result of lawsuit settlements from personal injury cases. Because a life annuity only pays out until the death of the beneficiary, it is considered a form of longevity insurance. If there are funds remaining in the annuity when the beneficiary dies, those funds are typically forfeited unless there is another annuitant or beneficiary named in the contract.

A life annuity has two phases: the accumulation period, which is the period of time during which the consumer is making deposits and accumulating wealth in the annuity, and the distribution phase, which is also called the payout phase since that is when the annuity is making payments to the annuitant. Certain annuities, particularly those associated with personal injury lawsuits, are structured to have only the distribution phase; these annuities are called immediate annuities.

Life Annuity Formula

The life annuity formula assists consumers in determining how much money they need to invest in an annuity in order to obtain a desired payout. It can also be used to provide a payout amount based on the amount the person can afford to invest. Typical information required by a life annuity formula is the age of the person, state of residence, gender, and then either the desired payment amount or the fixed investment amount desired. Most annuity calculators will provide a number of different options based on the type of annuity chosen.

As the baby boomer population continues to age, retirement products like life annuities will only grow in popularity. A life annuity calculator can help you determine the right product and help you plan for your future. Because a life annuity calculator is required to make fairly complex calculations with regard to present and future value and because there are so many variables involved in determining a life annuity payout rate, it is important to review your plan with a tax advisor or professional financial planner in order to make sure you are fully protected.

Life Annuity Calculator

To help you understand how much money you should contribute to an life annuity, use the following life insurance calculator to run a few different scenarios.
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Tim Ord
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