What is a Life Annuity?

Life annuities can provide a stream of income that is guaranteed for life and cannot be outlived. Here’s a look at just what is a life annuity.


There are many types of annuity products offered by insurance companies and financial institutions, so it is easy to get them confused. One of the most straightforward of all annuities is the life annuity. As a refresher, an annuity is a financial product that makes regular payments to the annuitant for a certain period of time. In the case of a life annuity, payments are made for life. Payments can be monthly, semi-annual, or annual. You can even set up your annuity so that payments increase periodically, i.e. to keep up with inflation.

Features of a Life Annuity

A life annuity is an immediate annuity. In other words the payout begins immediately (about 30 days) after the initial investment is made. You may be able to defer payments up to a year. For comparison, the other type of annuity is a deferred annuity in which you make payments for a period of time known as the accumulation phase. Then, you receive regular payments during the distribution phase. It’s possible to accumulate payments in a deferred annuity, then take a lump sum distribution of your investment and purchase a life annuity.

Once you make your initial deposit, you’re typically locked-in to the annuity, especially after the annuity makes its first payment to you. After that point, you won’t be able to take a lump-sum cash distribution of your annuity balance.

Some life annuities let you set a minimum guaranteed period. If you pass away during that period of time, your beneficiary would receive your payments for the remainder of the period. But, if you outlive the guaranteed period, your beneficiaries normally wouldn’t receive any payment from the annuity. Some life annuities allow your beneficiary to receive a cash or installment refund of any premium you have remaining in the annuity after you pass away.

The periodic payout from a life annuity is based on several factors including your age, your upfront lump-sum investment, the annuity rates at the time of purchase, and any survivor benefits you choose. If annuity rates are low when you make your purchase, you’ll be locked in with that rate.

Benefits and Risks

Though you contribute post-tax money to a life annuity, earnings on your contribution aren’t taxed until the money is paid to you. When you receive the payments, you’re subject to tax at your current tax rate.

There are no Federal limits on the amount of money you can invest in an annuity. You can make the investment at any age and you’re not required to start take required minimum distributions at a certain age. However, the annuity product itself will require you to start receiving payments between 30 days and 1 year from the time you make your first investment. If you’re not ready to start receiving payments, you can opt for a deferred annuity and then transfer your funds to a life annuity at another time.

Many retirement plans require you to take minimum required distributions based on an actuarial life expectancy table. Based on those calculations, it’s possible to outlive your money. The biggest benefit of a life annuity is that you have guaranteed income for life even if you live beyond the time frame in life expectancy tables. The insurance company accepts the risk that you may last longer than life expectancy tables predict.

Make sure you understand the type of products your annuity is being invested in. Annuities can be placed in FDIC insured accounts so that if the financial institution fails, your annuity is covered up to $250,000. However, some insurance companies and banks offer annuities that aren’t invested in CDs or other insured accounts. When these banks or companies fail, your annuity payments won’t be insured and cannot be recovered.