Lifetime Annuity Income Guarantees – What Are They?

Some annuity products promise lifetime annuity income. How do these products work, and what do you need to watch out for?

This is part of a series on annuity guarantees.

Lifetime annuity income products help you make sure that you (or somebody you care about) do not run out of money. With a lifetime annuity income guarantee, you get payments from the insurance company for as long as you live – whether it’s 150 days or 150 years.

Option 1: Annuitize for Lifetime Annuity Income

You can set up a lifetime annuity income stream in several ways. The traditional way is to “annuitize” or irrevocably tell the insurance company to make payments for life. You’ll get the highest monthly lifetime annuity income if you take this choice.

If you annuitize, you’ll give up all control over your money, but at least you can count on the income. If you change your mind and decide you’d rather have a lump sum of cash (as opposed to a stream of payments), you’re generally out of luck. Some investors buy your future payments, but this is typically expensive (for you).

Option 2: Set Up Lifetime Annuity Income Without Annuitizing

A newer option is to take a lifetime annuity income stream without annuitizing. Some insurance companies offer something like a ‘5% for life’ product. This promises a lifetime annuity income stream of 5% of your initial purchase amount until you die. Assuming you buy an annuity with $100,000, they’d guarantee at least $5,000 (or 5%) of income per year.

Unlike options where you annuitize, a ‘5 for life’ option allows you to take more or less than the promised lifetime annuity income amount each year. If you take less, there’s more in your account for later. If you take more, you run the risk of reducing future income streams.

You can also walk away with your remaining account balance if you don’t annuitize. You get to change your mind and do something else with the money if you want.

Lifetime Annuity Income Payments

The best lifetime annuity income stream will keep up with inflation. As a result, you should look for options that adjust payments and/or automatically increase your annual payments. Of course, there are always tradeoffs – so adding this feature will take away from something else.

Lifetime Annuity Income Options

You can choose several ways to set up your income stream. You can get lifetime annuity income payments for your life, or for the life of yourself and your spouse. Again, look at the tradeoffs.

For an in-depth explanation of how annuity payments work when you annuitize, read about lifetime annuities.

Be Aware

As with all annuity guarantees, lifetime annuity income promises are only as good as the insurance company that makes the promise. If the insurance company goes belly up, your income could go away.