What Does a Fixed Life Annuity Offer Protection Against?

A fixed life annuity primarily offers protection against longevity risk, which is the financial risk of outliving your money.

Instead of wondering how long your retirement savings need to last, you transfer that risk to the insurance company. In return, the annuity contract can provide guaranteed income for as long as you're alive.

If the annuity is structured jointly with a spouse, the income can continue for as long as either person is living.

That's the primary purpose of a fixed life annuity: creating an income stream you cannot outlive.

Key Takeaways

• Fixed life annuities primarily protect against longevity risk.
• Lifetime income can continue for as long as you live.
• Joint-life income can cover both spouses and continue as long as either person is alive.
• Annuities can be structured to provide beneficiary protection for unused premium.
• Lifetime annuity income can supplement Social Security, pensions, and other retirement income.
• Use only the amount necessary to contractually fill your retirement income gap.

What Is Longevity Risk?

Longevity risk is the risk of living longer than your retirement assets can support.

Nobody knows exactly how long they're going to live.

You may plan financially for a 20-year retirement and live for 30 years. Or you could live much longer than your statistical life expectancy.

That's where a lifetime annuity comes in.

The insurance company accepts the financial risk of your longevity and contractually agrees to continue making payments according to the terms of the policy.

Which Annuities Provide Lifetime Income?

Several types of annuity solutions can provide contractual lifetime income, including:

• Single Premium Immediate Annuities (SPIAs)
• Deferred Income Annuities (DIAs)
• Qualified Longevity Annuity Contracts (QLACs)
• Income Riders

The primary difference between these products is how they work and when the lifetime income begins.

The right solution depends on when you need the income and the specific guarantees you're trying to establish.

How Does a Fixed Life Annuity Protect Your Retirement?

Think about your retirement income as an income floor.

Your income floor consists of the dependable money regularly reaching your bank account.

That could include:

• Social Security
• a pension
• dividend income
• other dependable income sources
• guaranteed annuity payments

If those sources don't cover your required monthly expenses, a lifetime annuity can potentially fill the gap.

For example, if your dependable retirement income falls $3,000 short of what you need each month, you can determine how much money would be required to contractually create that additional $3,000 of lifetime income.

What Happens If You Live Longer Than Expected?

This is where the longevity protection becomes most important.

Once lifetime income begins, the insurance company is obligated to continue making the contractual payments for as long as the covered person is alive.

You don't have to predict whether you'll live to age 80, 90, 100, or beyond.

The lifetime guarantee addresses that uncertainty.

That's why lifetime annuities should be viewed as transfer-of-risk products rather than traditional investments.

Can a Fixed Life Annuity Cover Your Spouse?

Yes.

A lifetime annuity can be structured on a joint-life basis.

With joint lifetime income, payments continue as long as either spouse is alive.

If one spouse dies, the surviving spouse continues receiving the contractual income according to the terms selected when the annuity was established.

This can be particularly important when both spouses depend on the income to cover ongoing retirement expenses.

Joint Life Is Different From Naming a Beneficiary

Simply naming your spouse as the beneficiary doesn't necessarily mean your lifetime income will continue after you die.

That's an important distinction.

If you establish a single-life payout and list your spouse as the beneficiary, the income guarantee is still based on your life.

If your objective is for the lifetime income to continue uninterrupted for the surviving spouse, the annuity needs to be structured to cover both lives.

Does the Insurance Company Keep the Money When You Die?

Not necessarily.

One common misconception is that purchasing a lifetime annuity means the insurance company automatically keeps whatever is left when you die.

Lifetime annuities can be structured with beneficiary protections.

For example, certain payout options can provide for unused premium to pass to your beneficiaries if you die before receiving the full amount through income payments.

Adding beneficiary protection can affect the payout, so it's important to compare the available structures before choosing one.

What About Inflation?

A lifetime annuity solves longevity risk, but that doesn't automatically mean it solves inflation.

Those are two different retirement risks.

A fixed lifetime payment can continue for life, but its purchasing power may decline over time as prices increase.

Rather than assuming one annuity will solve every future inflation problem, you can evaluate your income floor over time and address additional income needs as they arise.

One approach is to purchase additional guaranteed income later if inflation creates a new income gap.

Social Security Is Already Part of Your Income Floor

For most retirees, Social Security is the foundation of guaranteed lifetime income.

If you're fortunate enough to also have a pension, that adds another layer of dependable income.

A private annuity doesn't necessarily need to replace those sources.

Instead, it can supplement them when there's a gap between your guaranteed income and the amount you need to cover your retirement expenses.

How Much Should You Put Into a Lifetime Annuity?

The goal isn't to put as much money as possible into an annuity.

It's to use the least amount of money necessary to contractually solve your income need.

If you need an additional $2,000 or $3,000 per month, determine how much premium is required to guarantee that amount.

There's no reason to allocate additional assets to the annuity simply because they're available.

The remaining money can stay available for liquidity, investments, emergencies, and other retirement needs.

Start With Two Questions

Before choosing a lifetime annuity, answer:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

For lifetime income, the first answer is straightforward: you want a guaranteed income stream that you can't outlive.

The second question determines which annuity structure may be appropriate.

Do you need income immediately?

Five years from now?

At age 75 or 80?

Once the timeline is established, you can compare the contractual income guarantees available.

Compare Lifetime Income Guarantees

Lifetime income annuities are commodity products.

Instead of choosing an annuity because you recognize the insurance company's name or like the product's marketing, compare the actual contractual income guarantees.

For the same premium and income start date, different carriers may offer different payouts.

The objective is to find the highest contractual guarantee from an appropriately rated carrier for your specific situation.

Where to Compare Lifetime Annuity Income

If you're trying to determine how much guaranteed income your money can produce, use our annuity calculators to compare current lifetime income quotes from multiple insurance companies.

You can also approach the calculation in reverse: determine how much monthly income you need and calculate how much premium is required to contractually fill that gap.

The Bottom Line

A fixed life annuity primarily protects against longevity risk—the risk of outliving your money.

It does this by transferring that risk to an insurance company that contractually guarantees income for your lifetime. If structured jointly, that protection can extend across both spouses and continue as long as either person is alive.

The goal isn't necessarily to replace your entire retirement portfolio with annuities. It's to identify the portion of your expenses that needs dependable lifetime income and determine whether an annuity can efficiently fill that gap.

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