Life Annuity
A financial contract where an individual pays a lump sum or series of payments to an insurance company in exchange for guaranteed periodic payments for the rest of their life. The payments continue regardless of how long the person lives, providing protection against outliving one's savings.
Example
“After retiring at 65, Margaret purchased a life annuity with $200,000 of her 401(k) savings, guaranteeing her $1,200 monthly payments for life.”
Memory Tip
Think 'Life = Lifetime payments' - as long as you're alive, the annuity keeps paying you annually.
Why It Matters
Life annuities provide crucial protection against longevity risk, ensuring retirees won't run out of money if they live longer than expected. With increasing life expectancies and declining pension availability, annuities can provide the guaranteed income stream that Social Security alone may not cover.
Common Misconception
Many people think annuities are poor investments because they don't build wealth or leave inheritances. However, annuities aren't investments - they're insurance against outliving your money, providing guaranteed income that no stock portfolio can match.
In Practice
John, age 70, invests $300,000 in a life annuity and receives $1,800 monthly ($21,600 annually). If John lives to 85, he'll receive $324,000 total - more than his initial investment. If he dies at 75, he'll have received only $108,000, but the annuity served its purpose of providing guaranteed income during his lifetime. The insurance company pools risk across many annuitants to make this arrangement profitable.
Etymology
From Latin 'annus' meaning year, originally referring to annual payments. The concept dates back to ancient Rome where citizens could receive lifelong payments in exchange for lump sum contributions.
Common Misspellings
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