What is a Life Annuity?

Annuities are financial instruments used by individuals to provide for the future. Typical annuities are paid into throughout a period of time and then reach a transition phase where payments begin to flow back out of the annuity. Annuities offer certain tax advantages that investors can take advantage of.

Funding

Life annuities are annuities that only last through the lifetime of the investor. Retirement accounts are normally set up as life annuities. Retirement accounts are typically funded with pre-tax payroll earnings of the individual. These annuities are paid into as long as the employee elects to, up to his or her termination or retirement from a company. If the employee quits or is terminated before he or she is eligible to withdraw retirement funds, then the funds stay in the account until that time.

Investing

During the time the funds are held in the annuity, they are managed by a broker. The broker keeps track of the investments made with the funds. Annuities early in funding can withstand relatively high risk investments. The longer the annuity is held, the older the employee gets and the more money is invested in the annuity, then the lower risk the investments need to be. When employees reach retirement the emphasis should be on stability instead of growth.

Receiving

After the employee retires or reaches the age he or she can withdraw from the annuity, payouts can begin. Life annuities typically provide payments monthly through the life of the individual, ceasing at death. Some wealthy individuals set up life annuities for relatives to disperse their money and avoid the inheritance taxes that would be paid if they simply left a sum of money to their family members.