What is a life insurance annuity? (2025)

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.

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.

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.