Annuities

An annuity is like a mortgage payment that works in reverse. In exchange for your investment, a life insurance company makes regular payments to you that include both interest and principal. But unlike a mortgage that normally ends after a specific period, the income payments can be guaranteed for the rest of your life.

Insurance companies usually issue annuities. In it’s simplest form, a straight life immediate annuity is one that guarantees you a set monthly income, from now until you die. The intent is to protect against out-living your income.

Couples normally use the joint-and-last survivor annuity. On the death of one spouse or annuitant, the survivor continues to get an income until they die. This is especially useful if one party is not competent enough to make financial decisions in their lives.

There are many variations on the basic annuity. In most cases, once the money is handed over to the insurance company, you lose all control over it. If there is no guarantee clause purchased, any residual value of the annuity is forfeited by your estate. When purchasing an annuity, you can specify if you would like a 5, 10 or 15-year guarantee. This means that the annuity is guaranteed to continue to pay out for 5, 10 or 15 years or to your death, depending on which came last. This way if you die in year one, your estate will continue to get payments up to the guarantee you purchased, therefore recouping some, if not all of the capital invested.

Alternatively if you lived until 110, you will still continue to get the payments you were promised.

Of course, there is a price to be paid for these options. The more add-ons that are purchased, the lower your monthly income will be. Interest rates also have an impact on income, but only at the time it is purchased.