Life Insurance Annuity
A life annuity insurance contract is a specialized type of insurance product that provides you with a regular income from a pre-arranged date in the future. Sold primarily by insurance companies, life insurance annuities require you to make regular payments into a tax-deferred account for a minimum number of years (or as a lump sum if preferred). Then on a pre-arranged date the insurance company begins to pay a fixed or variable amount back to you, either for a set amount of time or for the remainder of your time on earth.
Why would you want a life insurance annuity?
The main reason for investing in life annuity insurance is so that you have a guaranteed income throughout your retirement years. You simply pay in a fixed premium each month for a number of years, twenty, thirty or forty for example, or alternatively pay a large one-off payment into your annuity account. This is called the accumulation phase.
Then on a specified date, for example your 65th birthday or the day you retire, the life and annuity insurance account moves into the distribution phase. The most common form of distribution involves a regular payout, weekly or monthly, for the rest of your life so that you have an income you can rely on.
What are the drawbacks?
The main drawback of a life insurance and annuity policy is that you don’t leave any form of inheritance for those you leave behind when you die. In fact, what you are actually doing is giving your money to the insurance company on the proviso that they pay it back to you at a later date.
Unfortunately, if you were to die one week after the start of the distribution phase, then the annuity contract ends and all the money you paid in remains with the insurance company. On the other hand though, if you live for another 40 years then the account may pay more back than you actually paid in.
This type of insurance product is a bit of a gamble and the income stream you receive may not be as substantial as it would be if you were to invest in a savings scheme, for example. Life annuity insurance will guarantee a steady income for the remainder of your life and this can’t always be said about the money in a savings account.
So, as with any financial product life insurance annuities have their good points and bad points, and it’s up to you to weigh them up before deciding whether to invest or not.