A steady increase in Americans' longevity means retirement planning is more important now than it was for previous generations. The Department of Health and Human Services reports that between 1970 and 2006, the life expectancy of a male at birth increased by eight years, from 67.1 to 75.1. Because people are living longer, more are at risk for outliving their retirement savings. Retirement annuities, a product sold by life insurance agents, guarantee a steady income once the buyer reaches retirement age.
Contract Obligations
A straight life annuity pays the annuitant, or owner, a series of payments for the duration of her life. Because no refund of principal is issued if the annuitant does not live to receive it all, no beneficiary needs to be assigned.
Funding
To fund straight life retirement annuities, buyers may choose to make a lump sum payment, usually using money obtained from selling real estate or cashing out a current retirement account, or from an inheritance.Once that lump sum has been paid, no more contributions are necessary. Buyers may also fund these annuities by making monthly, quarterly, semiannual or annual payments.
Advantages
Because straight life annuities do not pay a death benefit, they are often recommended for people with no dependents who wish to receive the largest payment possible without paying a large amount of money. With a straight life retirement annuity, the annuitant is guaranteed not to outlive his income.
Disadvantages
Though a straight life retirement annuity guarantees that the owner will not outlive her income, it does not provide a death benefit to any dependents. Straight life annuities are also a large gamble when it comes to receiving all of the money invested. If an annuitant begins receiving a $200 monthly benefit at age 65 and lives to be 100, he will have received about $84,000 in benefits. But if he dies at 68, he will have received only $7,200 in benefits.
Tax Implications
Contributions and interest grow tax-deferred in a straight life retirement annuity. Withdrawals are made on a last-in, first-out basis, meaning payments withdrawn are subject to ordinary income tax until all the interest is received. Also, any funds withdrawn before age 59 1/2 may be subject to a 10 percent tax penalty for early distribution.
Member Comments