Lifetime Payout Annuity

What Is a Lifetime Payout Annuity?

A lifetime payout annuity is a type of retirement investment that pays out a portion of the underlying portfolio of assets for the life of the investor. Such annuities are sold by insurance companies and some financial institutions.

When an investor buys an annuity, they can pay a lump sum amount or deposit a series of payments to the insurance company. The insurance company, in turn, agrees to pay the buyer—called the annuitant—a series of distributions. There are various types of annuities with different payment schedules.

Understanding the Lifetime Payout Annuity

An investor may choose a lifetime payout annuity in order to eliminate the risk of outliving the amount of money set aside for retirement. The guaranteed payments for life reduce a person's longevity risk. Longevity risk refers to the chance that an investor's life expectancy or survival rate exceeds expectations leading to more-than-expected cash payments for the insurance company.

A lifetime payout annuity can be structured to provide a fixed or a variable payment:

• With a fixed payout, the investor receives a pre-set dollar amount for each payment. A cost of living adjustment (COLA) can be added. COLA is an adjustment to the annuity payments to compensate the investor for inflation or rising prices.
• With a variable payment, the amount of the annuity fluctuates with the value of the investments held in the annuity's portfolio.

Payments can be made to the annuitant in monthly, quarterly, annual installments. A downside to a lifetime payout annuity is that they may leave little or nothing for the investor's heirs. Payouts from a lifetime payout annuity typically end with the death of the policyholder.

The policyholder can purchase adjustments to the plan, which arrange for payments to continue to an estate or allow for a guaranteed number of payments. These adjustments may result in a smaller payment for the annuity holder.

Special Considerations

An annuity is a financial product that pays a fixed stream of payments to an individual. It is primarily used by retirees as a form of guaranteed income.

Annuities are created and sold by financial institutions, which invest funds deposited by individuals over time, and then when the client is ready, begin issuing regular payments drawn from the account to the annuity holder.

The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments begin, the contract is in the annuitization phase.

Annuities are appropriate for individuals seeking stable, guaranteed retirement income. Because the money invested in the annuity is not accessible without a penalty, it is not recommended for younger people or those who don't have an emergency fund that they can tap into if necessary.

Criticism of Annuities

One criticism of annuities is that they are illiquid, meaning money can't be moved in and out of annuities easily. Deposits into annuities are usually locked up for a period of time—called the surrender period. A penalty would be incurred for early withdrawals.

The 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.