Definition
A life annuity is an annuity that pays income for as long as the contract owner lives, with payments ceasing at death unless a guarantee period or survivor provision is elected.
Why it matters
The life annuity is the structure that delivers the pure longevity-pooling benefit: income that continues for life regardless of how long that life lasts. It is the arrangement against which features that modify the pure structure — period certain, joint life, refund provisions — are understood as trade-offs that exchange some of the pooling benefit for a bequest or a payment floor.
How it works
A life annuity converts a premium into income payable for the contract owner's lifetime. Because payments stop at death in the pure form, the resources of those who die earlier than expected fund the continued payments of those who live longer — the mortality credit mechanism that makes life-contingent income more efficient than a self-funded drawdown to a fixed age. Optional provisions modify the pure structure: a period certain guarantees payments for a minimum term, a joint-life form continues payments to a survivor, and a refund provision returns unpaid premium to a beneficiary. Each provision reduces the income relative to the pure life annuity because it retains for the estate value that would otherwise fund mortality credits.
In practice
A life annuity in its pure form maximizes lifetime income per dollar of premium and leaves nothing at death; every provision added to soften that outcome reduces the income. The decision is how much pooling benefit to trade for a bequest or a payment floor. The questions to put to a professional are what the pure life income is, what each elected provision costs in reduced income, and what fraction of the frictionless pooling benefit the chosen configuration delivers.
In the Longevity Standard Framework
In its pure single-life form, the life annuity carries the same claim profile as the single-premium immediate annuity, and its structural reading is shared with the single-premium immediate annuity claim profile. The cost-structure property determines how much of the structural pooling benefit reaches the participant, and the life annuity's single-layer embedded spread places it near the efficient end of transferred-risk arrangements. Period-certain, joint-life, and refund provisions do not change the four property values but reduce realized income by retaining for the estate value that would otherwise fund mortality credits.
Related terms
- Single-premium immediate annuity
- Annuitization
- Mortality credits
- Period certain
- Joint and survivor annuity
- Single-premium immediate annuity claim profile
- Income annuity
- Payout rate