What is the Difference Between A Life Annuity and A Living Annuity?

If you are retiring and are receiving a pension, you face a bit of a dilemma. With any pension you are entitled to do whatever you want with one-third of the money, the remaining two-thirds, however, needs to be put in a compulsory annuity. You have two choices there - a life annuity or a living annuity.

Life Annuities

A life annuity is the more traditional of the two. It is also sometimes referred to as a fixed annuity. With a life annuity, you give a lump sum of money to a financial institution, usually a life assurer and, in return, you receive a set amount in monthly payments for the rest of your life. The amount of the monthly payment is determined by several factors: the amount invested, your life-expectancy, the annuity variations you select, and the actual prevailing interest rates on the day you purchase the life annuity.

Life expectancy becomes a factor because it is how the life assurance company determines how long it will expect to have to pay you. If you have a shorter life expectancy, you will receive higher monthly payments, and vice versa. Because of this factor, women, who statistically live longer than men, generally receive lower monthly payments on a life annuity.

It is important to note the interest rate factor since once you purchase your annuity the rate is locked in for life, it is best to shop for a life annuity when interest rates are high.

The advantage of the life annuity is that you cannot "outlive" your benefits since they keep coming until you die. The main disadvantage of the life annuity is that it is based on a single life expectancy of the purchaser. Your survivors, (except for your spouse if you choose a joint survivorship life annuity) are not entitled to receive continued payments or what is left of the lump sum after you die, should you die before the calculated life expectancy. Still, for many seniors who do not like to take risks with investments, the guaranteed return on a life annuity is a safe and comfortable choice.

Living Annuities

The more modern alternative to the life annuity is the living annuity, sometimes also known as a flexible annuity. In a living annuity instead of a fixed interest rate paid on your lump sum at the time of purchase, you are able to select from a variety of investment products, stocks, mutual funds etc. - that your contributions to the annuity are put into.

Living annuities are more complicated and riskier by their very nature than fixed or life annuities, but they also carry with them the potential of higher capital gains in the long term. Before selecting any annuity product, it is best to speak with a financial adviser.