Life Annuity
A financial product that provides guaranteed income payments for the rest of an individual's life. The payments begin either immediately or at a future date and continue until the annuitant dies, regardless of how long they live.
Example
“After retiring at 65, Margaret purchased a life annuity that pays her $2,000 monthly for as long as she lives.”
Memory Tip
Think 'Life = Length' - a life annuity pays you for the LENGTH of your entire LIFE, no matter how long that is.
Why It Matters
Life annuities protect retirees from outliving their money, providing financial security when other savings may be depleted. They're particularly valuable as people live longer and need income that can't be exhausted through market downturns or overspending.
Common Misconception
Many people think annuities are poor investments because if you die early, you 'lose' money compared to keeping it invested. However, annuities are insurance against longevity risk - you're paying for the guarantee that you'll never run out of income, which has tremendous value for financial security.
In Practice
John, age 67, invests $300,000 in a life annuity that pays $1,800 monthly. If he lives to 85, he'll receive $388,800 total ($1,800 × 12 months × 18 years). If he lives to 95, he'll receive $604,800 - significantly more than his initial investment. The insurance company pools risk across many annuitants, using some who die early to fund payments for those who live longer.
Etymology
From Latin 'annuus' meaning yearly, combined with 'life' to indicate payments continuing for one's entire lifetime. The concept dates back to Roman times when citizens could purchase lifetime income from the government.
Common Misspellings
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