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What is a Life Annuity?

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  • Written By: Katharine Swan
  • Edited By: Niki Foster
  • Last Modified Date: 09 September 2016
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In this day and age, it's full-time work that makes the world go around. It's next to impossible to survive - and succeed - without having a full-time job. So how do you plan for your retirement years, when you can no longer, or no longer want to, work a full-time job?

One answer is to invest in a life annuity. A life annuity is a fund that you contribute to during your working years, while you have a steady and reliable income. The advantage to investing in a life annuity, instead of just saving the money yourself, is two-fold: your investment grows according to the interest rates the life annuity offers, and the money is tax-free until it is withdrawn from the life annuity. The funds in a life annuity will not be taxed until you retire and start getting payouts, at which time it is considered income and is taxed as such.

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A life annuity enables people to plan their retirement. Once you retire and start getting payouts from your life annuity, you'll get monthly checks for the same amount each time. This means that you'll have a steady income to depend on, even when you no longer work a full-time job. You can also purchase a life annuity all at once, instead of investing gradually over the years - an option that is particularly popular with those who want to retire early, leaving less time to accumulate a large investment, or those who did not plan ahead and start investing in their future early on.

Like all investment plans, a life annuity will penalize you if you withdraw money early, so it's important to invest only a percentage of your income that you can safely spare. Once you are eligible to receive periodic payouts, you can retire, safe in the knowledge that your future is secure. The life annuity will continue to send you regular payments until the event of your death, at which time payments will stop and the funds will be turned over to your heirs.

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