An annuity is a long-term contract where you pay an insurance company upfront or over time in exchange for guaranteed future income — typically during retirement. It can increase at fixed or market-based rates depending on the annuity type, and it may continue to grow even in the payout period.
Learn more about what a life annuity is and how it differs from other annuity types so you can make informed financial choices for the long term.
A life annuity is a financial product that provides guaranteed income for the rest of your life, alleviating common concerns associated with retirement. For instance, you might worry that you’ll outlive your savings or that Social Security won’t cover your needs. You could choose a life annuity to guarantee lifelong income in exchange for a one-time or ongoing contribution.
You can open a single-life annuity that only pays out while you’re alive. Or, you could choose a joint-life annuity that covers two people — typically you and your partner — and pays out as long as at least one party is alive.
Here are two of the most common types of life annuities:
During a life annuity’s accumulation phase, you contribute to your account via regular premiums or a lump sum. In the payout or annuitization phase, your insurance company makes systematic payments to you.
Note that certain demographic factors determine how your payouts look. For example, the longer your life expectancy, the smaller your regular annuity payments might be. That means women generally receive smaller payouts than men because, on average, they have longer life expectancies.
Because inflation can reduce the dollar’s purchasing power over time, you might want to add inflation protection — this means your payouts will increase over time to help keep pace with market changes. You can often set these increases at a fixed annual percentage or tie them to actual increases in cost of living, as measured by the Consumer Price Index.
The key difference between a life annuity and a life insurance annuity is that the latter provides a death benefit to your beneficiaries. A life annuity guarantees income for you while you're alive. Alternatively, a life insurance annuity ensures your beneficiaries receive payouts — either as a lump sum or over time. If you choose, you can arrange these payments to last your beneficiaries’ whole lives.
You likely want a life annuity if your goal is a steady income stream for the rest of your life. Remember that while this option might still help you take care of beneficiaries to some degree, a life insurance annuity is specifically designed to provide them with guaranteed income when you die.
A fixed life insurance annuity delivers its payout to your beneficiary over a specific time frame, often 10 or 20 years. It’s as simple as dividing the death benefit by the length of the payout period. If your beneficiaries die before completing the full payout, they can pass it on to their own beneficiaries.
With a lifetime life insurance annuity, the insurer calculates a payout to your beneficiary based on their life expectancy. While this dictates the size of the payment, a life insurance annuity with the lifetime designation ensures your beneficiary is covered forever.
Whether or not you should buy a life annuity depends on your long-term retirement goals.
If you’re worried about outliving your sources of retirement savings, you might consider a life annuity. However, a life annuity might not be the best choice if you need access to your funds for unexpected expenses or want to leave a larger financial legacy for your heirs.
A life annuity benefit is the guaranteed income you receive from a life annuity for as long as you live. It provides financial security by ensuring you won’t outlive your savings, making it a reliable option for retirement planning.
The amount an annuity that costs $100k pays monthly depends on several factors, including the annuity type, your account balance, and your demographic. For example, a fixed annuity might pay around $500–$600 per month for life, while a variable annuity’s payouts could fluctuate based on market performance.
An annuity certain pays out over a fixed period, regardless of how long you live. A life annuity, on the other hand, provides payments for as long as you live, ensuring you don’t outlive your income. However, unless the contract includes a beneficiary option (such as a joint-and-survivor or period-certain feature), payments typically stop upon the annuitant’s death.
A life annuity can be a great option for those seeking guaranteed income throughout retirement, reducing the risk of outliving savings. However, it may not be ideal for everyone. Life annuities typically don’t offer liquidity, meaning you may not have access to large sums of money in case of emergencies. Additionally, unless your annuity includes a beneficiary option, payments stop upon your death, which may not be ideal if you want to leave assets to loved ones.
This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.
