Understanding the basics of a life insurance annuity – especially its potential as an investment instrument –  is important for anybody who's casting about for a way to ensure a reliable retirement income in their senior years. An annuity can be one valuable tool in the retirement toolkit, for a fact, as long as one understands its structure and what it can, and can't, do.

Basically, any annuity is nothing more than an investment instrument offered for sale mostly by insurance companies. Additionally, there are a number of different kinds of annuities currently being sold these days, though just about every annuity shares two common characteristics; an immediate or deferred payout and whether or not the proceeds (called “returns”) are fixed at a certain payout rate or come with a variable payout rate.

Keep in mind that a life insurance annuity that features a fixed rate is a guaranteed instrument. Any annuity that's labeled “immediate” begins paying out as soon as it's purchased. Of course, one that comes with a deferred feature will mean that a person investing in the annuity will begin receiving payments at a later, predetermined, rate. 

How a fixed rate life insurance annuity can offer a guaranteed return is by taking the money paid for it by investing those funds in generally low-risk securities such as government-issued bonds. In the trade, they're usually called “fixed annuities.” Annuities that feature variable rates of return are characterized by the fact that they their results will vary in accordance with the performance of the funds they invest in.

These funds are known as sub-accounts and they're usually composed of stocks, for the most part. A fixed rate life insurance annuity mechanism starts first of all with the handing over of money to the insurance company, which will in turn pay out a predetermined amount over a defined length of time. As was said, as “single premium immediate annuity,” or SPIA, will start paying back out immediately.

For those purchasing a “single premium deferred annuity,” or SPDA, the payments will begin at a date the purchases selects. Usually, this is at the age of retirement, whatever that happens to be. An SPDA can be used as a tax-deferred investment. They can also be a good way to convert a lump sum of cash into a stream of income, in many effective cases. It's wise to remember that once a life insurance annuity payment begins it won't change, even to account for inflation.

The fixed rate life insurance annuity payout term can be set in one of two ways; paid out for fixed period like 10 years, for example, or paid out as an annuitized instrument, meaning that payments will be received until death and once that's occurred, the annuity company keeps any remaining funds in the account.

This can be an important attraction to a fixed annuity, as the annuitant (the insured) is betting that he or she will live for longer than the draw-down rate at which time the annuity would otherwise be depleted and the insurance company is betting that the annuitant will pass away before that time, in which case the company stands to gain substantially. Read all terms and conditions of any annuity carefully before purchasing one.