For many consumers the decision to invest can be a difficult one. With so many options available, so many banks and corporations offering investment terms, the process can be such a headache many will simply not invest. This however would be a...
Guaranteed lifetime annuity
A guaranteed lifetime annuity, as the name implies, is a way to provide a guaranteed income for the rest of your life, no matter how long you live. Companies that offer guaranteed lifetime annuities do so by calculating an average expected lifetime for the annuitant, based on available information, such as age and gender. Doing these actuarial calculations for only one or five or ten annuitants could result in a financial debacle, since actual lifespans vary so much from person to person. But when the pool of annuitants reaches thousands, differences due to exceptional longevity or unexpectedly early demise even out, through the statistical principle known as regression to the mean.
What this means for the consumer is that a guaranteed lifetime annuity is an easy way to convert a single sum of money into an unending income stream for life. Upon purchase of the annuity, annuity payments begin flowing on a set timetable, usually monthly, and continue for the life of the annuitant. The amount of money in each payment accounts for the number of payments in your actuarially expected lifespan, less whatever amount is charged by the provider of the annuity for that company's administration of the arrangement, and usually adjusted for an assumed future rate of return on the annuitant's investment, when reinvested by the company.
The downside of a guaranteed lifetime annuity is that early death will result in a reduced ultimate value for a given annuitant, while others may receive radically more than the average. For example, if an annuity is calculated with the assumption that the annuitant will live for twenty years and he dies after five, the benefits he would have received for 15 years are never paid, whereas if he lives for 30 years, he receives 10 additional years of payments beyond the amount his purchase price was calculated to provide. For this reason, receiving a guaranteed lifetime annuity has been described as "betting on your own life." Put another way, a guaranteed income stream provides an annnuitant with protection against the "downside risk" of outliving his money.
Different features can be appended to a basic annuity. For example, one can purchase an annuity that provides protection against inflation by rising in step with interest rates. A guaranteed lifetime annuity could be guaranteed for the life of the annuitant, and then guaranteed at some percentage of the original annuity, for a surviving beneficiary. Since the surviving beneficiary will receive benefits after the death of the annuitant, the original payment is reduced to provide the survivor benefit.