People often think of different things. For many people the first thought when the word annuity is mentioned is that an annuity provides an income – a pension is a type of annuity. However, while every annuity could be used to provide an income, the ways in which the income is provided differs depending on the annuity.
A period certain income annuity provides income for a certain period. You provide the principal and the insurer will pay back the principal plus interest for 5 years, 7 years, 10 years, 20 years, whatever timeframe you select.
Why might you do something like this? Perhaps you are forced into early retirement at age 57 and you need an income to carry you through until you are old enough to collect Social Security. Perhaps you want to help a grandchild with their college expenses, without giving them a lump sum, a period certain annuity could help cover college costs for the years needed for them to get that bachelor’s degree. Perhaps you already own an annuity and you’d like to convert a part of that annuity value into a tax-free life insurance benefit; a period certain annuity could fund that conversion.
The use of a period certain annuity can also offer certain tax advantages because most of the income produced is not only free from federal and state income taxes, but it isn’t included in calculating whether you owe taxes on your Social Security benefit. It would take too much time to get into all of these different uses, so the main point you should take away from this is a period certain annuity pays out a steady income for a specified number of years.
Those Roman legionnaires were given a life income annuity that paid an income as long they lived. When they died, the income stopped. You can also get the same type of annuity today. It’s a great deal if you live a long time and a bad deal if you get hit by a bus next month.
Why would you buy this type of life income annuity? People buy them when they don’t plan to leave this particular money to children or charities and want to get the maximum income. A person typically would not put all of their assets into buying a life income annuity, but they might purchase one to ensure they have a guaranteed income to cover the essentials if something happens to their other assets.
A life annuity can be set up to last as long as one person lives or two. If your health and genes are good, a life annuity can provide a dependable monthly income for a long time, so it is often used in conjunction with other assets to provide for a tranquil retirement.
The rap on a life annuity is if you die the insurer keeps any money that is leftover, but that isn’t necessarily true. You can buy a type of life annuity that guarantees that if you die early the annuity will continue to pay out to your beneficiary until your original principal is returned – if you put in $100,000 the insurer will pay out at least $100,000.
There are a variety of other options. You can have the annuity pay out until you die or for 20 years, whichever is longer. You can arrange it so that your spouse would still get all or half of the original income amount if you die. You can even buy a life annuity that won’t start payments until 10 or 20 years from now. The different options offer different amounts of income. The first annuities were issued by the Roman Empire as a reward to legionnaires for their service. Two millennium later annuities are still being used to provide a dependable income.