Lifetime Annuity Clarification And Explanation

One of the more interesting types of annuities on the market is the lifetime annuity. Although this type of contract is actually quite common, it is frequently misunderstood. The ambiguity comes from the imprecision of the term. The "lifetime" can mean a number of different things in regard to the functionality of the contract.

The broadest definition of lifetime annuities is that they are based on life contingencies and only last as long as the designated individual remains alive. If the annuity is designed to make payments for a specific period of time regardless of the lifespan of an individual, the annuity is considered an annuity certain. Once the annuity is contingent on a person's life for continuation, the annuity no longer guarantees payments for a period of time, but can terminate upon the death of the covered individual. This can also be called a single-life annuity.

Although the core components are the same, a variation on the lifetime annuity is a built-in stipulation that payments will continue for the lifetime of an individual. An annuity based on a life can still terminate before the individual dies. This just means that the contract is designed to make payments for either the lifetime of the individual or until the period of guarantee expires. These contracts can last for 5 years, 10 years, 20 years, or some other specified length of time.

In lifetime income annuities, the insurance company will continue to make payments for the duration of the life of the covered individual. This is an excellent type of annuity to use in retirement planning, as it provides a definite income for the duration of the contract life. These guaranteed life income annuity contracts ensure that the retiree does not run out of income prematurely. Based on the definition of life expectancy, 50% of the population will live longer than they are supposed to live. A lifetime income annuity takes much of the guesswork out of future income sources.

This type of specialized contract requires use of insurance tables to determine the applicable interest rates and premium costs. To determine the lifetime annuity rates, the insurance company uses an annuity table to determine the life expectancy of the annuitant. Combined with other criteria, the insurance company determines the cost of the annuity, size of the premium payments, and interest rate applied to the account.

Adding a life income guarantee on a fixed annuity contract will inevitably carry a higher cost than a standard annuity. The insurance company must take on the risk that you will live well beyond your life expectancy, thus costing the company far more than they anticipate. With a period certain contract, the cost to the insurance company is fixed and predetermined. They know exactly how much they are responsible to pay out.