5 Things You Need to Know About Life Annuities

Having a diversified investment portfolio is an important part of planning for retirement. Including both fixed and variable life annuities as part of it will not only safeguard against forfeiture, but can also provide you with financial security when you can no longer depend on steady income from your job.

Keep reading to learn five important things about life annuities and how they can benefit you.

1. What Is a Life Annuity?

If you’re part of the middle class and currently advancing your career, you’ve probably been offered a life annuity plan by a financial company. But what exactly are they?

Well, life annuities are insurance policies that pay a regular sum to the annuitant (the owner of the policy) after a certain period of time and until their death. In turn, the annuitant is expected to pay either a lump sum or a set regular premium for a period of time, which is known as the accumulation phase.

Individuals often purchase annuities to help them budget for retirement and enjoy a stable income in their later years.

2. Safeguard Against the Possibility of Forfeiture

Most life annuity plans have payout systems that end upon the death of the policyholder. This means that any unpaid annuities amounting to the paid-up value of the policy will be forfeited if the annuitant dies before they are paid. This allows the companies that offer these insurance products to make a profit. With a broad sample of policyholders, there will be a significant amount of forfeitures that helps offset any potential loss incurred whenever someone outlives the paid-up value of their annuity plan.

You can take steps to safeguard yourself against this possible forfeiture. Life annuity providers usually allow you to add a secondary beneficiary to your policy for an extra fee. That inflates the overall cost, but it’s a valuable precautionary measure to safeguard your investment in case you don’t outlive the cost of the policy.

Before you purchase a life annuity, make a modest assessment of your health to determine whether it would be best to include a secondary beneficiary or dependent who stands to greatly benefit from the annuity payouts in case you die too early. Adding a secondary beneficiary ensures that the annuity is useful, no matter what happens.

3. See if Your Company Will Pay Your Premiums

If your company offers employee benefits, ask whether they will pay for your life annuity premiums as part of your benefit package. Some companies will deduct the premiums from your salary and pay them on your behalf. That doesn’t mean you just break even, because the amount that goes to your annuity payments won’t be declared as income when tax season rolls around.

If the company you work for is able to purchase life annuity plans for a large number of employees, it may even secure a discount in premiums from the provider. Even if it can’t, it’s likely that the provide would upgrade the plan sold to you through the employer. This will give you a plan with greater value than the one you would have purchased individually, and at no extra cost.

4. Buy Fixed and Variable Annuities When Possible

If you are looking to rely on annuities for day-to-day expenses when you retire, try to purchase both fixed and variable life annuity plans.

Fixed annuity plans guarantee a regular payout at a fixed sum. They’re very reliable, but they are subjected to inflation. If inflation overtakes the value of your fixed annuity, you could struggle to sustain yourself despite receiving payouts of the same amount.

This is where variable annuities come in. They’re less stable than fixed annuities, so you can’t always predict how much you’ll be getting from them. The amount you received from a variable annuity depends on the performance of the investment products your premiums have gone into. That kind of fluctuation comes with some risks, but it also means that the investment will adjust to the ebb and flow of the market, instead of steadily decreasing in value like a fixed annuity does (market downturns happen, but inflation is guaranteed).

When the payout from your variable annuity is good, don’t treat it like a windfall. Set aside a portion of it. If you do, you’ll be able to supplement your fixed annuity when inflation takes a bite out of its value (learn more in How Annuities Can Help You Plan the Rest of Your Life).

5. Consider Impaired Life Annuities

In some ways, annuities are the opposite of life insurance. Since life insurance pays out when the policyholder dies, the insurer takes on greater risk by insuring someone likely to die at a younger age. Annuities, however, pay out over the course of the policyholder’s life. This means that the insurer takes on greater risk the longer the annuitant lives.

If you have severe health conditions or a number of health risk factors that decrease your life expectancy, you might qualify for an impaired life annuity. These take into account the lower risk of issuing you an annuity and offers better terms than a conventional life annuity (either a higher payout, a lower premium, or a combination of both).

Prepare for the Future

There’s no telling how long any of us will live. Without sound financial planning and preparation, it could mean long retirement years spent scraping by. Purchase life annuities to make sure you keep receiving a healthy income long after you stop working.