How Does A Lifetime Annuity Work: Lifetime Annuities Explained
No doubt you have heard of annuities. In fact, if you are already preparing and planning for retirement, you may even have one. But you may be fuzzy on the details of what exactly a lifetime income annuity is, and how it works.
How does a Lifetime Annuity Work?
Lifetime income annuities are insurance products designed to provide income throughout your retirement. If you’re about to retire, or have already, you may want to consider this financial product as a stable, guaranteed source of income.
Also called “immediate annuities” or “payout annuities,” this product functions almost opposite to life insurance policies.
Here’s how a lifetime annuity works: rather than paying regular premiums to an insurance company in exchange for your heirs receiving lump-sum payment when you die, annuities are bought from insurance companies with a lump sum of cash, and in return you get regular income payments until you pass away (or for the amount of time you’ve agreed upon).
Those payments can be made on a monthly, quarterly, or annual basis, depending on what you prefer.
The size of your payments depends on a few variants, including how many payments you’re scheduled to receive in a given year and the length of your payment period. Another huge factor: current interest rates, as your initial lump sum investment that you spent when buying the annuity accrues interest that is then distributed in your payments.
Let’s do a lifetime income estimate for a 67-year-old woman with $150,000 to invest. If this woman opts for 12 a year at monthly intervals, she could receive about $800 each month, according to the NewRetirement Lifetime Annuity Income Calculator and based on current interest rates.
How Much Can You Get from a Lifetime Annuity?
Over 20 years, that amounts to $192,240—more than $42,000 more than her initial $150,000 premium. And the longer she lives past age 87, the more money she’ll get, as she’ll receive that $800 payment each month for the rest of her life.
Of course, there’s no such thing as free money, and annuities do come with some initial upfront fees. For example, most lifetime income annuities are purchased from an insurance broker who will typically take a commission. The amount of that commission varies, but could range up to about 10%. On a $150,000 annuity, that translates to a $15,000 payment to your broker.
However, if you buy an annuity from an investment company rather than a traditional insurance company, you may be able to avoid a broker and thus steer clear of paying a commission.
With an immediate lifetime annuity, you start getting your payout right away, making it a good option for someone who’s already retired. You can also buy a deferred lifetime annuity where you pay now, but start the income at some date in the future.