Whole Life Annuity
What Is a Whole Life Annuity?
A whole life annuity, otherwise called a life annuity, is a financial product sold by insurance companies; it gives out month to month, quarterly, semi-annual, or annual payments to a person however long they live, beginning at a stated age. Annuities are typically purchased by investors who need to secure a income stream during retirement.
How a Whole Life Annuity Works
Annuities can be structured to make payments for a fixed amount of time, normally 20 years, or make payments however long the annuitant and their spouse is alive. Actuaries work with insurance companies to apply mathematical and statistical models to evaluate risk while determining policies and rates.
The accumulation period happens as payments are being made by the buyer of the contract to the insurance company; the annuitization phase happens when the insurance company makes payments to the annuitant.
Toward the finish of the term, the value in the account would be transformed into a surge of payments in what's called the annuitization phase.
Special Considerations
Annuities can be structured generally as either fixed or variable. Fixed annuities give standard periodic payments to the annuitant. Variable annuities permit the owner to receive greater future cash flows on the off chance that investments inside the annuity fund get along admirably and more modest payments assuming its investments do inadequately.
Most variable annuities let you invest in various assets, chiefly stock mutual funds. This accommodates a less stable cash flow than a fixed annuity however permits the annuitant to receive the rewards of strong returns from their fund's investments.
There are no IRS contribution limits, and any earnings are not taxed until removed. Withdrawals of taxable amounts from an annuity are subject to ordinary income tax and, whenever taken before age 59\u00bd, might be subject to a 10% IRS penalty.
Agents or brokers selling annuities need to hold a state-gave life insurance license, and furthermore a securities license on account of variable annuities. These agents or brokers normally earn a commission in light of the notional value of the annuity contract.
Illustration of a Whole Life Annuity
Assuming a 6% rate of return for the entire years, a $100,000 lump-sum investment north of 20 years in a taxable account would be worth $222,508 toward the finish of the term. A tax-deferred variable annuity pre-tax (0.25% annual annuity charge) would be worth $305,053 at the term's end, and a tax-deferred variable annuity post-tax, assuming lump-sum withdrawal (0.25% annual annuity charge), would be worth $239,436.
Features
- A whole life annuity is an annuity that pays a person for their lifetime, starting at an age agreed upon in the contract.
- Annuities can either be paid out at a fixed rate that holds consistent paying little heed to how the underlying investments perform, or at a variable rate, meaning the rate changes in view of the performance of the underlying investments.
- Most variable annuities permit the policyholder to invest in different funds to build a diversified portfolio.
- Annuities are insurance financial products that can be structured to pay a policyholder for a specific amount of time, or however long the policyholder and their spouse are alive.
- The payment schedule can change and can be as frequently as month to month or as inconsistently as on an annual basis.
