A life income annuity, sometimes called a single premium immediate annuity, is the type of product that corporations use for pensions. If you work for a company and you’ve accumulated money in your pension plan, when you retire you get an income for the rest of your life. The product that underlies that pension and monthly income is a life income annuity. Not only can you buy this same product on your own, but you may get a better deal than you’d get with a corporate pension. When companies shop for these annuities, they don’t look for the highest income for their employee, but the lowest cost to them. By for shopping it yourself you can probably get a better income than you would through your company. Of course, you want to be sure that the company offering your annuity will be around as long as you are, so be sure to investigate it thoroughly.
What exactly is a life income annuity? First let’s talk about what it’s not. It’s not a deferred annuity. It’s not an accumulation annuity, or a fixed annuity, or a variable annuity, or one of those indexed annuities. It’s an income annuity. You put a lump sum of money into the annuity and it pays you back an income for the rest of your life. You can make sure to adjust for inflation, choose a flat income for the rest of your life, or structure it lots of different ways. Once you decide upon an income, the annuity guarantees you that income for the rest of your life, no matter how long you live.
There is a disadvantage. Once you put money into the life income annuity you can’t get it back out. You have exchanged a lump sum payment for an income. If you need money for an emergency, you don’t have access to it anymore. We recommend to our clients that they don’t put more than 25 percent of their investible dollars into these products. For some people, this can be a deal-breaker.
There’s also an advantage. You can get a pretty decent income. The amount is determined by your age and by interest rates. You can find annuities that promise a better than average return on your investment, guaranteed for the rest of your life.
If you decide that an annuity is right for you, be sure to thoroughly investigate the company selling the annuity. You want to make sure it will be around as long as you are.