Life annuity is a contract between a financial institution and the consumer where the consumer makes a lump sum or series of payments to the institution. In return for these payments, the consumer gets regular paybacks from the insurance company or the financial institution after retirement or after a stipulated period of time.

• A major advantage of life annuities is that unlike 401k savings vehicles, where the consumer or beneficiary can “cash out” or exhaust the vehicle, these may provide regular payments till the death of the annuitant. The best option is to cash out the 401k plan and convert it into a life annuity when there are enough funds in the vehicle. However there are many factors such as the age of the annuitant, cash value of the 401k vehicle, inflation, and early death that can stifle the benefits of a life annuity.
• The various types of life annuities include joint annuities, guaranteed annuities, fixed and variable annuities, and impaired life annuities. However these are annuities that are offered on a worldwide basis and annuities in the United States are a little different compared to other countries. Sometimes it becomes difficult for a consumer to choose the right type of annuity because of such a plethora of options available to them.
• Joint annuities: These are annuities that include joint-life or joint-survivor annuities where payment stops after the death of one or more annuitants. For instance a joint annuity may make payments to the spouse of a deceased person until the death of the spouse as well. This provides protection to both the annuitants in case of death of either of them.
• Variable and Fixed annuities: Fixed annuities are those that make a fixed payment at regular intervals or those which increase the amount at a fixed percentage as time passes. Variable annuities are those that vary according to the performance of the investment, much like in a mutual fund. These are more popular since they are tax deferring vehicles which are taxable only at the time of withdrawal.
• Guaranteed annuities: Usually in a normal life annuity, the death of the annuitant results in a forfeiture of the annuity. To avoid such a loss an annuity can be purchased that has a clause which provides guaranteed annuity in which the annuity provider is obligated to make annuity payments for at least a definite number of years. If the annuitant outlives such a period (called Period Certain) then the annuity provides payments till the death of the annuitant. If the annuitant dies before the “period certain” then the annuitants beneficiary or estate will receive payments from the issuer till the “period certain” expires.
• Life annuities employ methods that are similar to an insurance policy provider and extensive use of actuarial science is made. Actuaries are hired in order to assess the risk in providing the annuity to an individual. This science makes use of advance mathematics, probability, finance, game theory, financial mathematics and other stochastic methods in order to come to a conclusion about the feasibility of the annuity.

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