Whole Life Annuity Due

Whole Life Annuity Due: What It Is and How It Works

Overview

A whole life annuity due is an insurance contract that pays a guaranteed income for the annuitant’s remaining lifetime, with each payment made at the beginning of the payment period (monthly, quarterly, semiannually, or annually). Because payments start at the period’s start, an annuity due delivers one period of additional value compared with the same annuity paid at period end.

How It Works

• Purchase: An investor typically funds the annuity with a single premium (or sometimes with multiple premiums during an accumulation phase).
• Payouts: Once annuitization begins, the insurer pays a fixed or indexed amount for as long as the annuitant lives.
• Death: Payments stop when the annuitant dies unless the contract includes features such as a guaranteed period, a joint-and-survivor option, or beneficiary provisions. Without such features, any remaining principal stays with the insurer.
• Variations: Contracts can be single-life or joint-life (continues while one spouse is alive), fixed or inflation-adjusted, and may include period-certain guarantees.

Annuity Due vs Ordinary Annuity

• Annuity due: payments at the beginning of each period.
• Ordinary annuity: payments at the end of each period.
• Valuation: The present value of an annuity due = present value of an ordinary annuity × (1 + r), where r is the discount/interest rate for the period. This reflects the additional period of time that each payment is held by the recipient.

Tax Treatment

• In nonqualified (outside-IRA) annuities, payments are taxed as ordinary income to the extent they represent earnings; a portion often represents a tax-free return of principal through the exclusion ratio.
• In qualified accounts (traditional IRA/401(k)), annuity payments are generally fully taxable as ordinary income.
• In Roth IRAs, qualified distributions remain tax-free.

Choosing Periodic Payments vs Lump Sum

Consider these factors:
– Time value of money: A lump sum today may be worth more if invested successfully; periodic payments provide steady income and spending discipline.
– Investment risk: A lump sum exposes you to market and behavioral risk (you could lose principal or overspend).
– Longevity risk: Periodic lifetime payments hedge out the risk of outliving your savings.
– Tax and estate planning needs: Lump sums may have different tax timing and estate implications than lifetime income.

Pros of a whole life annuity due:
– Guaranteed lifetime income, starting immediately and providing a slight value boost because payments are at the period start.
– Protection against longevity risk.

Cons:
– Limited liquidity and access to principal.
– Insurer keeps remaining funds at death unless protected by contract riders.
– Payments are generally fixed (unless inflation protection is purchased), potentially eroding purchasing power.
– Taxed as ordinary income (except Roth).

Suitability and Considerations

A whole life annuity due may suit retirees who:
– Want a stable, predictable income stream and protection against outliving assets.
– Prefer to avoid managing investment risk or are concerned about spending a large lump sum.
Assess before buying:
– Financial strength and ratings of the insurer.
– Contract features: guaranteed periods, joint options, inflation protection, commutation or surrender terms, and fees.
– Your health, life expectancy, cash needs, and overall retirement income mix (pensions, Social Security, other savings).

Key Takeaways

• A whole life annuity due pays lifetime income with payments at the start of each period.
• It reduces longevity risk and provides immediate, predictable cash flow, but limits liquidity and may leave little for heirs unless riders are added.
• Compare annuity due to lump-sum alternatives, evaluate insurer strength, and consider taxation and contract features before purchasing.