Definition
Life Annuity: A life annuity is an insurance product that provides a guaranteed, fixed periodic payment to an individual (the annuitant) for the remainder of their life. Upon the annuitant’s death, the payments cease and no further amounts are payable to beneficiaries.
Examples
- Single Life Annuity: John purchases a single life annuity at age 65, ensuring he receives a monthly payment of $1000 for the rest of his life. If John passes away at age 85, the payments stop and his beneficiaries receive nothing further.
- Joint Life Annuity: Mary and her husband buy a joint life annuity that pays them $800 monthly. The payment continues throughout their lives and only stops after the death of the second spouse.
- Life Annuity with Period Certain: Jane buys a life annuity with a 10-year certain period, meaning she will receive payments for life, but if she passes away within 10 years, her beneficiaries will continue to receive payments until the end of that 10 years.
Frequently Asked Questions (FAQs)
Q1: What happens to the payments from a life annuity after the annuitant dies?
- A1: The payments cease immediately upon the death of the annuitant, and no further payments are made to beneficiaries unless the annuity has a guaranteed period certain.
Q2: Can I outlive my life annuity?
- A2: No, a life annuity is designed to provide payments for the lifetime of the annuitant, ensuring you cannot outlive the income stream.
Q3: Are there tax implications for life annuities?
- A3: Yes, payments from a life annuity may be subject to income tax, depending on the source of the funds used to purchase it, as well as the tax status of the annuitant.
Q4: Is the payment amount from a life annuity fixed?
- A4: Typically, yes, the payment amount in a standard life annuity is fixed. However, there are variable and indexed annuities that adjust based on market performance or inflation.
Q5: Can I surrender a life annuity?
- A5: Generally, life annuities do not allow surrender; they are meant to provide lifelong fixed income. However, specific contract details may vary.
Related Terms
- Annuity: A financial product that provides a series of payments made at equal intervals.
- Joint and Survivor Annuity: An annuity that makes payments for the lives of two persons and continues until both have died.
- Period Certain Annuity: An annuity that guarantees payments for a specific period, regardless of whether the annuitant is alive during that period.
Online References
Suggested Books for Further Studies
- “The New Financial Order: Risk in the 21st Century” by Robert J. Shiller
- “Retirement Income Planning: The Baby Boomers 2016 Guide to Maximize Your Income and Make it Last” by Mark J. Orr CFP
- “The Oxford Handbook of Pensions and Retirement Income” by Gordon L. Clark, Alicia H. Munnell, and J. Michael Orszag
Fundamentals of Life Annuity: Insurance Basics Quiz
### What is a life annuity designed to do?
- [x] Provide guaranteed payments for the life of the annuitant.
- [ ] Provide lump sum payments to beneficiaries after death.
- [ ] Pay out only during a specific period.
- [ ] Provide a return based on stock market performance.
> **Explanation:** A life annuity provides guaranteed periodic payments to the annuitant for the rest of their life.
### What happens to the annuity payments after the annuitant dies?
- [ ] They continue to the beneficiaries.
- [ ] They are held in a trust.
- [x] They cease immediately.
- [ ] They become an estate asset.
> **Explanation:** Upon the death of the annuitant, annuity payments cease immediately and are not passed on to beneficiaries.
### What type of annuity continues to provide payment after the first annuitant dies?
- [ ] Single Life Annuity
- [x] Joint and Survivor Annuity
- [ ] Period Certain Annuity
- [ ] Fixed Term Annuity
> **Explanation:** A Joint and Survivor Annuity continues to provide payments until both annuitants have passed away.
### Can a life annuity be surrendered to receive the remaining balance?
- [ ] Yes, you can surrender a life annuity anytime.
- [x] No, life annuities generally do not allow surrenders.
- [ ] Yes, but only in the first year.
- [ ] Yes, with a penalty.
> **Explanation:** Life annuities are designed to provide fixed payments for life and generally do not allow for surrender.
### How are life annuity payments typically taxed?
- [ ] Not taxed at all.
- [x] As ordinary income.
- [ ] As capital gains.
- [ ] Taxed only if exceeding initial investment.
> **Explanation:** Payments received from a life annuity are typically taxed as ordinary income.
### What differentiates a life annuity from a fixed-term annuity?
- [ ] Investment growth rate.
- [ ] Initial premium amount.
- [x] Duration of payments guaranteed to last for life.
- [ ] Beneficiary benefits.
> **Explanation:** A life annuity guarantees payments for the lifetime of the annuitant whereas a fixed-term annuity guarantees payments for a specific period.
### Who can best benefit from a life annuity?
- [ ] Someone seeking a lump-sum payout.
- [x] Someone seeking guaranteed income for life.
- [ ] A person planning to transfer wealth.
- [ ] An investor seeking high returns.
> **Explanation:** Life annuities are ideal for those seeking guaranteed income throughout their lifetime.
### Are the payment amounts from a life annuity adjustable?
- [ ] Always adjustable based on market conditions.
- [ ] Adjustable based on annuitant’s request.
- [x] Typically fixed, unless it's a variable or indexed annuity.
- [ ] Adjustable based on inflation rate only.
> **Explanation:** Payment amounts in a standard life annuity are typically fixed, though variable and indexed annuities may have adjustable payments.
### How does a joint life annuity differ from a single life annuity?
- [ ] It only guarantees funds for a fixed time.
- [x] It covers multiple lives, continuing payments until all annuitants have passed.
- [ ] It is a term insurance product.
- [ ] It provides lump-sum payments to the surviving beneficiaries.
> **Explanation:** A joint life annuity provides payments until the death of the last annuitant covered by the policy.
### What is a key feature of a period certain life annuity?
- [ ] It only pays for a specific period unrelated to life duration.
- [x] It ensures payments for life but guarantees a minimum payment period.
- [ ] Payments increase each year.
- [ ] It involves high investment risks.
> **Explanation:** A period certain life annuity ensures payments for the lifetime of the annuitant, with a guaranteed minimum payment period.
Thank you for exploring life annuities and testing your knowledge with this quiz. Keep advancing your understanding of insurance and retirement planning!
