What Is a Life Insurance Annuity?
Learn how life insurance annuities work, the types available, and who they’re best for. Understand the pros, cons, and tax implications of annuities with Quote.com.
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Alexandra Arcand
Insurance and Finance Writer
Alexandra Arcand is an outreach administrator and insurance expert located in North Central Ohio. She has a passion for writing, investing, and education. As an insurance content writer for over three years, Alexandra has first-hand experience in business finance, economics, and real estate. She leads an outreach writing team that specializes in travel, real estate, healthcare, law, finance, an...
Insurance and Finance Writer
UPDATED: Jun 30, 2025
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We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes should be easy. This doesn’t influence our content. Our opinions are our own.
Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.
UPDATED: Jun 30, 2025
It’s all about you. We want to help you make the right legal decisions.
We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes should be easy. This doesn’t influence our content. Our opinions are our own.
On This Page
A life insurance annuity is a financial product that provides a steady stream of income—often for life—based on premiums or lump sums paid to an insurance company. While life insurance typically protects loved ones after your death, annuities focus on providing income while you’re alive, usually during retirement.
Both products are often offered by life insurance companies and can work together to create a balanced financial plan for the future.
How Life Insurance Annuities Work
When you purchase an annuity from a life insurance company, you’re exchanging a lump sum or a series of payments for a future income stream. In return, the insurer agrees to make regular payments to you—either for a set number of years or for the rest of your life.
There are two main phases of an annuity:
- Accumulation Phase: When you contribute money to the annuity.
- Payout Phase (Annuitization): When the insurer begins making regular payments to you.
The timing, type, and frequency of those payments depend on the kind of annuity you choose.
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Types of Annuities in Life Insurance
Life insurance companies offer different types of annuities to meet a variety of financial needs. The main categories are based on when payments begin and how returns are calculated.
Immediate vs. Deferred Annuities
- Immediate Annuity: Payments begin right away—usually within a year of purchase. These are ideal for retirees who need income soon.
- Deferred Annuity: Payments begin at a future date. Your money grows during the accumulation phase, often tax-deferred, before income begins.
Fixed vs. Variable Annuities
- Fixed Annuity: Offers guaranteed payments at a fixed interest rate. These are considered low risk and predictable.
- Variable Annuity: Payments vary based on the performance of underlying investments (like mutual funds). These offer higher growth potential but more risk.
Some insurers also offer indexed annuities, which tie returns to a market index (like the S&P 500) with less risk than variable options.
Pros and Cons of Using a Life Insurance Annuity
Pros:
- Predictable income, often for life
- Tax-deferred growth on earnings
- Can supplement Social Security and retirement savings
- Optional riders for long-term care or guaranteed death benefits
Cons:
- Limited liquidity—early withdrawals may incur fees and tax penalties
- Potential for lower returns compared to direct investments
- Complexity and fees (especially for variable annuities)
Annuity vs. Life Insurance Payouts: What’s the Difference?
While annuities and life insurance are both contracts offered by insurers, their payouts serve different purposes:
| Feature | Life Insurance | Annuity |
|---|---|---|
| Payout Timing | After death | While alive |
| Payout Receiver | Beneficiary | Policyholder (you) |
| Goal | Protect heirs | Provide retirement income |
Some people use both: life insurance for legacy planning and annuities for income during retirement.
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Who Should Consider an Annuity?
You might consider a life insurance annuity if:
- You’re close to or in retirement and want guaranteed monthly income
- You’re worried about outliving your savings
- You prefer a hands-off, low-risk income source
- You want to diversify your retirement income beyond 401(k)s and Social Security
Annuities can be especially attractive for conservative investors seeking stability rather than growth.
Final Thoughts and Next Steps
A life insurance annuity can be a powerful way to secure a predictable income stream in retirement, complementing other assets like 401(k)s, pensions, and Social Security. Before buying one, be sure to:
- Compare different types of annuities
- Understand fees and riders
- Consult a licensed financial advisor or insurance agent
At Quote.com, we help you make smarter insurance and retirement decisions. Ready to explore your options? Use our quote tool to compare annuities and life insurance policies today.
Frequently Asked Questions
Do annuities provide lifelong income?
Yes—many annuities offer lifetime income options. These are known as “life annuities” and can be structured to:
- Last for your lifetime only
- Cover both you and a spouse
- Provide payments for a minimum number of years (even if you pass away early)
This makes them a strong tool for longevity risk—the chance you’ll outlive your money.
Are annuities taxable?
Yes, but only when you receive payments:
- If funded with pre-tax dollars (like from an IRA), the entire payout is taxable.
- If funded with after-tax dollars, only the earnings portion is taxable.
Withdrawals before age 59½ may also trigger a 10% early withdrawal penalty from the IRS.
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Alexandra Arcand
Insurance and Finance Writer
Alexandra Arcand is an outreach administrator and insurance expert located in North Central Ohio. She has a passion for writing, investing, and education. As an insurance content writer for over three years, Alexandra has first-hand experience in business finance, economics, and real estate. She leads an outreach writing team that specializes in travel, real estate, healthcare, law, finance, an...
Insurance and Finance Writer
Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.