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Life insurance annuity

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Supplement your income later in life.

A life annuity can serve as a form of income after you retire. The general idea is simple: you either buy the policy in a lump sum or pay into it slowly over time while you’re working, then once the contract matures you have a number of options for redeeming it.

How do annuities work?

Annuities have a number of parts that can change based on your particular contract and preferences:

  • How much income will you receive? The amount of income you receive from your annuity is fixed at the time of purchase of the policy in that you can’t personally add to it. The income can be adjusted each year by a fixed percentage or in line with inflation.
  • How often are income payments made? Income payments can be set up on a monthly, quarterly or half-yearly basis.
  • How long do income payments last? You can choose to have income payments be made in one lump sum, for a fixed number of years or for the rest of your lifetime. This decision is made when you purchase the annuity.
  • What happens if you die? You can work with the insurance company to designate a beneficiary or beneficiaries. At the same time, you can choose whether the remaining amount will be paid in a lump sum or a stream of payments upon your passing.

Who should consider a life annuity?

Given annuities allow for a fixed stream of income, they’re generally helpful for a couple of types of people:

  • You prefer a set budget. A guaranteed payment over a set number of years or your lifetime can help if you’re looking to keep your spending in check, especially if you receive a large sum of money at once.
  • You’re looking for a low-risk retirement supplement. Even a well-planned retirement may require extra income. Given annuities are highly customizable contracts, you can get those extra payments without heavy risk.

What happens to a life annuity if the owner dies?

It’s important to understand just how your annuity is structured in case of your death. Work with the insurance company you’re considering to find out your options and choose what’s best for your loved ones.

  • If you die before the income payment period.
    If you pass away at an early age your money may go to the annuity provider. It’s also possible that any money contributed to the point of your passing goes to your beneficiaries.

    You can have a minimum payment term as part of the annuity contract that allow your spouse or dependents to receive payments for the rest of the term outlined in the contract. They may also be paid in a lump sum.

  • Reversionary annuity.
    If you’re willing to pay much more for your contract, you can guarantee a lump-sum payout to your beneficiaries. Depending on your situation, life insurance may be a more cost-effective option.
  • Guaranteed period option.
    A guaranteed period option in the contract of an annuity will allow your beneficiary to receive the remaining income payments as an income stream or a lump sum.

What type of life annuity should I get?

Annuities can be made to fit many different goals. The one that’s best for you will depend on why you’re looking for an annuity, your current financial health and other factors such as any other retirement income you’ll have available.

Some options include:

  • Fixed annuity.
    In terms of investments, a fixed annuity is a fairly safe one. The amount that you pay in and are in turn paid out remains the same. The most change that may happen is an adjustment based on inflation to the amount you’ll be paid out, and in some cases a guaranteed interest rate.

    If you’re looking to get an annuity that’s a safe investment, fixed may be the way to go.

  • Variable annuity.
    A slightly more complex option is a variable annuity. Rather than a guaranteed amount, it changes based on how different funds perform. Funds are typically managed by the insurance company the contract is taken out with.

    Irregularity of payments and extra risk make this an option more suited to you if you’re not relying on the annuity alone for income.

  • Fixed-period annuity.
    Typically fixed-period annuities pay out over 5, 10, 15, 20 or 25 years. You’ll usually find that fixed-period annuities have higher payouts.

    If you’re not strictly relying on the annuity for income and want a higher amount sent with each payment, it may be better to go with a fixed-period contract.

  • Lifetime annuity.
    As the name suggests, a lifetime annuity pays out over your entire life. Payments will typically be in smaller amounts because they’re stretched over a longer period of time.

    Because there’s no chance of it running out, you may prefer this if you’re looking for guaranteed payments.

Annuity vs. lump sum

A lump-sum payment is a single payout, as opposed to an annuity that pays out slowly over time.

Life Annuity

Pros
  • Guarantees income for a set amount of time
  • Pay any taxes slowly as you’re paid out
  • Possible to continue paying beneficiaries if you pass away
Cons
  • Typically doesn’t gain a significant amount of interest
  • Limited access to the funds
  • Steep penalties for early withdrawals

Lump Sum

Pros
  • Access to the entire amount for large purchases
  • Potential to invest in a high-return account
  • Can leave any amount not spent to beneficiaries
Cons
  • Any taxes will likely be due on the full amount
  • Potential to spend it too quickly
  • Weight of responsibility is on you to manage funds

Compare life insurance companies

Name Product Issue Ages Coverage Range Medical Exam Required
20 to 60 years old
$100,000 to $8,000,000
No
Term life insurance with no policy fees and the freedom to cancel anytime. Simple application process that can get you approved for coverage instantly.
20 - 80 years old
$25,000 to $10,000,000
No
Quickly get a quote for coverage with this marketplace, which compares term & whole life insurance policies from 45+ carriers.
21 - 54 years old
$50,000 to $1,000,000
No
Affordable 2-, 10- and 20-year term life insurance policies. Instant quotes and no medical exams.
18 - 85 years old
$10,000 to $10,000,000+
Depends on provider and policy
Compare quotes from 16 life insurance companies side by side.
20 - 85 years old
$100,000 to $1,000,000
Depends on policy
Get a term or whole life insurance quote from Fidelity Life - starting as low as $15/day.
18 - 75 years old
$100,000 to $5,000,000
Depends on provider and policy
Apply for a simple instant-decision policy free of charge. Compare quotes from multiple A-rated carriers.
18 - 80 years old
$50,000 to $25,000,000
Depends on provider and policy
Get a quote within minutes from more than a dozen insurers.

Compare up to 4 providers

How is a life annuity different from life insurance?

Life insurance and annuities share some similar features, but they each play different roles in financial planning. Annuities are contracts and designed to be paid out while you’re still alive, and life insurance provides money to your loved ones when you die.

Here are a few major differences between the two:

Life annuityLife insurance
Is there a death benefit? Typically the total premiums paid plus any interest accruedA sum agreed on when you apply
Can it be built up as savings?YesNo
Are there tax benefits?Taxed as income upon payoutTax-free benefit

How much do annuities cost?

Annuity costs can be difficult to determine because the level of annual income you receive is based on investment costs, risk, profit for the annuity provider and the various administrative and marketing costs.

Providers will promise a certain return on your money, and this promise of return is calculated after taking costs into account. This means you won’t generally be paying for annuity costs right out of your income payments.

You’ll be paid the promised return on your money regardless of whether the provider makes more or less than what they promise to you. Different providers will offer up annuities with different cost structures.

Bottom line

An annuity can be a helpful way to supplement retirement income in certain financial portfolios. Typically it isn’t a good supplement for life insurance, and can be much more costly than simply taking out a policy.

Shop around before you settle on a provider and compare your options to find the plan that best suits your goals.

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