Does Annuity Pay out Forever?

by Wilhelm Schnotz, Demand Media
    A lifetime annuity will provide payments into your old age.

    A lifetime annuity will provide payments into your old age.

    Using investments to fund your retirement can be a great strategy, as long as the market cooperates and your nest egg doesn’t lose value. If you’re nearing retirement age, the fluctuations of the stock market may make you long for something more guaranteed. An annuity, which can provide payment for the rest of your life if you choose so, can provide a guaranteed monthly income.

    Lifetime Payments

    If you buy a life annuity, you can expect to receive a fixed chunk of income each month for the rest of your life. As the named beneficiary, you receive a monthly payment based on your investment and your projected lifespan, but the annuity stops making payments when you die. While this revenue stream won’t last forever, it’ll help pay the rent until the end of your days -- long as the company that provides the annuity stays in business.

    Joint and Survivor Payments

    While you’ll never find an annuity that makes monthly or annual payments forever, choosing to buy into a joint and survivor annuity allows you to pass on your annuity payment to a named beneficiary when you die. You’ll only be able to pass on the annuity payment to the person named as the beneficiary, and your annuity amount is based on a combination of your investment and the projected lifespans of you and your beneficiary.

    Fixed Term Payments

    Another type of annuity offers payment over a fixed term, such as 15 years, for example. This contract is more straightforward, with benefit amounts precisely outlined by the terms of your contract. If you outlive the annuity’s terms, you and the provider simply part ways. If you die before the annuity’s term runs out, the contract isn’t canceled, as with a lifetime annuity, but can be passed to heirs. Your heirs may receive a lump-sum payout of the annuity’s value rather than continuing to receive your benefits.

    Pros and Cons

    The idea of buying an annuity that guarantees a monthly payment for your lifetime can be tempting, particularly if you’re worried that you’ll live so long you’ll outlast your savings. While a lifetime annuity can provide income until your death, it also comes with a downside: You’re locked into the interest rates at which you purchase the annuity. Because of this, if you opt for security during a time when crummy interest rates are the norm, you’re committing yourself to a lifetime of low returns.

    About the Author

    Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.

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