What is a Whole Life Annuity Due?
A whole life annuity due is a financial product offered by insurance companies that provides annuity payments at the beginning of each designated period—monthly, quarterly, or annually—making it distinct from annuities that pay at the end of the period. This product ensures that the holder receives payments for as long as they live. Upon the death of the annuitant, the remaining funds are retained by the insurance company.
Whole life annuities are often a preferred choice for investors aiming to secure a guaranteed income stream during retirement. The process involves two main phases: the accumulation phase, wherein payments are made to the insurance company by the buyer, and the liquidation phase, in which the insurance company disburses payments to the annuitant.
Key Takeaways
- A whole life annuity due ensures payments at the start of each designated period (monthly, quarterly, semi-annually, or annually) beginning at a specified age, continuing for as long as the annuitant is alive.
- After the annuitant’s demise, the annuity payments cease and any remaining funds revert to the insurer.
- Differ from ordinary annuities by requiring upfront payments at the beginning of each period.
Understanding Whole Life Annuity Due
Annuities are popular financial products intended to create a reliable income stream during retirement. Investors contribute to the annuity, and upon annuitization—the point at which they start receiving payments—the annuitant begins to regularly receive income.
Annuities can be crafted to provide payments over a fixed number of years, like 20 years, or for the lifetime of the annuitant and their spouse. Actuarial experts employ statistical and mathematical models to evaluate risk when setting policies and rates for these products.
A key characteristic of an annuity due is that it requires payments to be made at the beginning rather than the end of each period. While the receiver of annuity due payments acquires a legal asset, the payer accumulates a legal liability.
Unless the annuity is part of a Roth IRA, the income received from an annuity is subjected to regular income tax.
Periodic or Lump Sums
Investors often face the decision of opting for periodic payments or a lump-sum distribution. This decision revolves significantly around the time value of money—the concept that money available now is worth more than the same amount in the future.
For instance, if offered a $100,000 lump-sum today, comparison with a serial flow of smaller payments over years becomes essential. Factors affecting this decision include the implied interest or discount rates of the periodic payments, potential investment risks and returns from the lump sum, and the immediate need for cash.
Choosing a lump-sum payment involves risks. Aggressive investment of the lump-sum could surpass the value realized from periodic payments, or result in complete loss in adverse market conditions. Additionally, the temptation to utilize or exhaust the lump sum is difficult to manage, influencing many to favor periodic payments. Tax implications also play a critical role in the decision between lump-sum and periodic payments.
Related Terms: annuitant, accumulation phase, retirement, actuarial science, lump sum payment
