An annuity is a contract between an individual and an annuity provider. Under the contract, the individual makes an initial investment in return for the guarantee that the provider will make monthly payments to the investor in the future. There are various types of annuities. This article is going to focus on longevity annuities and their nuances.
What is a Longevity Annuity?
A Longevity Annuity is a specific type of annuity under which the annuitant commits money upfront in exchange for a future monthly payout that will continue for the rest of his or her life.
Longevity annuities are purchased with a one-time lump-sum premium. The payouts are (are or can be?) deferred, meaning they begin at some future date (at least 2 years) after the annuity is purchased. During the deferral period, the insurance company invests the initial investment money on behalf of the annuitant. The longer the annuitant chooses to delay his or her payouts, the greater the size of the payouts will be.
Longevity annuities are also commonly referred to as deferred income annuities or DIAs.
Payout Options that can be added to a Longevity Annuity:
The owner of a longevity annuity can decide if he or she wants their payouts to depend solely on lifespan, or if the addition of a guaranteed component is ideal. The following are the payout options for a longevity annuity:
Example of a Longevity Annuity:
Susan is a 52-year-old woman who is planning for her retirement. She decides to buy a longevity annuity to provide income when she runs out of income from her IRA. Susan buys the annuity with an initial investment of $100,000. She delays her payouts until she is 75 years old, and the annuity provider invests her principal investment during the deferral period. When Susan turns 75, she begins to receive her payouts of $986.79 per month. She receives her monthly payouts until she passes away, at which time the remaining assets in her annuity account are passed down to her daughter (her designated beneficiary).
Pros of Buying a Longevity Annuity:
Cons of Owning a Longevity Annuity:
The Bottom Line
With so many annuity variations, it is crucial for potential investors to research the different types of annuities. Annuities offer the benefit of being highly customizable and can be modified to fit the needs of an individual investor. Investors should understand all the options that are available in order to make the best choice for their own situation.
Special thanks in preparing this summary of “What is a Longevity Annuity?” goes to Bob Carlson, leader of the Retirement Watch advisory service and chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.
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