What is a 'Lifetime Payout Annuity'

A Lifetime Payout Annuity is a type of insurance product that pays out a portion of the underlying portfolio of assets over the life of the annuitant. A lifetime payout annuity can be structured to provide fixed or variable payments. In a fixed payout version, the investor receives a fixed dollar amount for each payment, potentially with cost of living adjustments (COLA). Payouts under a variable payout will fluctuate because payments are based on the value of the investments held in the annuity's portfolio.

BREAKING DOWN 'Lifetime Payout Annuity'

Investors may choose a lifetime payout annuity to head off the risk of outliving the amount of money set aside for retirement. Basically, the guaranteed payments for life reduce a person's longevity risk. However, this product can cause problems for those wanting to leave estates to heirs. Payouts from a lifetime payout annuity typically end with the death of the policyholder. The policyholder can purchase adjustments which allow payments to continue to an estate or which allow for a guaranteed number of payments, but these can result in a different payout.

All About Annuities

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals and then, upon annuitization, issue a stream of payments at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.

One criticism of annuities is that they are illiquid. Deposits into annuity contracts are typically locked up for a period of time, known as the surrender period, where the annuitant would incur a penalty if all or part of that money were touched. These surrender periods can last anywhere from two to more than 10 years, depending on the particular product. Surrender charges can start out at 10% or more and the penalty typically declines annually over the surrender period.

Annuities are appropriate financial products for individuals seeking stable, guaranteed retirement income. Because the lump sum amount put into the annuity is illiquid and subject to withdrawal penalties, it is not recommended for younger individuals or for those with liquidity needs. Annuities are complex investments. Before deciding to invest make sure you understand the pros and cons.

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