In today’s world of longer lifespans and unpredictable markets, securing a stable income for retirement is more important than ever. One financial tool that offers peace of mind and long-term security is a life annuity. Life annuities provide a unique and valuable benefit: guaranteed income for life. To fully appreciate their value, it’s helpful to understand how they differ from traditional investments – and why both have a place in a well-rounded financial plan.
What is a life annuity?
A life annuity is a contract between an individual and a life insurance company. In exchange for a lump sum, the insurance company will pay you a guaranteed monthly income for the rest of your life. The starting income is calculated by taking into account your age, gender, purchase sum and chosen annual increase amount. Some insurers will also consider health and lifestyle factors, which could boost your starting income.
The core benefit: Lifetime income
The primary advantage of a life annuity is its ability to provide income that lasts as long as you live. This addresses a major concern in retirement planning: longevity risk, which is the possibility of outliving your savings. With a life annuity, you can rest assured that your income won’t run out, no matter how long you live.
Insurance versus investment: Different tools for different jobs
To understand the role of life annuities, it’s useful to think of retirement income planning like maintaining a home. You wouldn’t use a hammer to fix a leaky pipe, and you wouldn’t use a spanner to hang a picture. Each tool has a specific purpose. Similarly, insurance and investment have different roles in your financial toolbox.
Insurance, such as a life annuity, is designed to protect you from specific risks – in this case, the risk of outliving your money. It pools risk across many people, allowing insurers to provide guarantees that you can’t achieve on your own. When you buy a life annuity, you’re essentially trading a portion of your wealth for the security of a predictable income stream.
Investments, on the other hand, are growth-oriented tools. They can build wealth over time through exposure to markets. Equities, bonds and other investment vehicles offer the potential for returns, but they also come with risks like market volatility, inflation, and the challenge of effectively managing income withdrawals for the rest of your life.
Why you need both
A blended annuity is like a well-stocked toolbox. It combines the strengths of insurance and investment to address different financial challenges, offering both protection and growth.
A blended annuity includes two components for your financial toolbox:
• Insurance (life annuity component) as your safety gear – it protects you from the unexpected.
• Investment (living annuity component) as your power tool – it helps you build and grow wealth, but it comes with risks that need skillful handling.
If you only have one tool for all your home maintenance, you’re unlikely to get the job done. In the same way, if you only rely on investments to fund your retirement, you’ll also be limited – you might run out of money if markets underperform or you live longer than expected. If you only rely on insurance, you might miss out on growth opportunities that could enhance your lifestyle or leave a legacy.
A blended annuity gives you both: the safety of guaranteed income and the power of market-linked growth.
Here’s how a blended annuity addresses multiple retirement challenges:
Life annuities offer a powerful way to ensure financial stability in retirement. By understanding the distinct roles of insurance and investment – like using the right tool for the right job – you can build a retirement plan that balances growth with guaranteed income. When used together, these tools can help you live with financial confidence and security in your later years.
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