Life Annuity

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Definition:

Life annuity is the financial instrument that comes with a predetermined periodic payout amount until the annuity owner (annuitant) dies.

Description:

Life annuity is a financial product under which the annuitant pays premium to secure a life annuity. The annuity plan is used to prepare you financially for retirement income. Life annuities provide beneficiaries with the fixed payments at regular intervals. In common, life annuities come in two different phases: the accumulation phase and the other is distribution phase.

Accumulation phase is the period when the buyer funds their annuity with either a lump sum payment or regular premium payments. During this period, the insurance company makes regular payments. Life annuity becomes a regular source of income. The insurance company stops the payment to the annuity after death or if the annuity is close to the completion of annuity.

While annuity pays a guaranteed income it does not take into account the factor of inflation. There are different types of life annuities that includes:

• Immediate Annuity: An immediate annuity, like a payout annuity, an income annuity, or a single-premium immediate annuity, has only a distribution phase.

• Guaranteed Annuity: A guaranteed annuity, also known as a year's certain annuity or a period certain annuity, pays out for a set length of time and then continues to pay out to a beneficiary or estate after the annuitant passes away.

• Fixed Annuity: On the owner's deposits into the annuity, a fixed annuity pays out a fixed percentage or interest rate.

• Variable Annuity: When markets are performing well, variable annuities can provide bigger returns or payouts. They do, however, carry more risk than fixed annuities because the account's value may drop if the markets perform poorly.

• Joint Annuity: A joint annuity makes payment until both spouses die. After the death of the primary annuitant, the secondary annuitant may receive a reduced amount.

Example:

Mohit, aged 60 years, purchased a life annuity with a single premium price of Rs.10 lakh. It was an annuity with annual payout. Under the annuity plan, Mohit will receive an annuity of Rs.77,344/- per annum.

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