What Is a Life Insurance Annuity and Is It Worth It?

A life insurance annuity is a payment structure for life insurance through which the death benefit is paid out to the policy’s beneficiaries progressively rather than in one sitting. The insurance company may pay out life insurance annuity benefits over a multi-year period or for as long as the beneficiaries are alive.

Read on for more information about life insurance annuities such as what their advantages and disadvantages are and how they differ from standard life annuities.

On This Page

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  How Do Life Insurance Annuities Work?

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  What Types of Life Insurance Annuities Are There?

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  What Are the Benefits of a Life Insurance Annuity?

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  How To Get Life Insurance Annuities

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  FAQs

How Do Life Insurance Annuities Work?

A life insurance annuity is a type of life insurance that pays out the death benefit in installments over a predetermined period of time rather than paying out a single lump sum after the insured’s death. Your insurer may pay you monthly, quarterly or annually if you opt to receive the death benefit in installments.^[1]

The portion of the death benefit that has not yet been paid out may accrue interest, which means the final payout for an annuity life insurance policy may end up being larger than if it had been paid as a lump sum. However, you may have to pay taxes on any money you receive from your insurance carrier that exceeds the face value of the policy.^[2]

Keep in mind that a life insurance annuity is different from a traditional retirement annuity, also known as a life annuity. Life annuities protect against the possibility that you will outlive the money you saved for retirement by paying out a steady living benefit similar to a pension for a set amount of time or for the rest of your life. So while life insurance only pays out after you die, an annuity generally pays out until you die, although many retirement annuities do allow your beneficiaries to claim any money you are still owed upon your death.^[3]

What Types of Life Insurance Annuities Are There?

See the following sections for an overview of the two main types of life insurance annuities, which differ based on how they distribute the death benefit to the beneficiaries of the policy.

Fixed-Period Annuities

Fixed-period life insurance annuities pay out a portion of the death benefit at fixed intervals for a limited window of time, often lasting 10 to 20 years, with the full death benefit being paid out by the end of the term. Notably, annuity recipients selected by the insured may have the option to select their own beneficiaries in case they die before the full death benefit has been paid out.^[4]

Lifetime Annuities

Conversely, lifetime life insurance annuities are designed to pay out a portion of the death benefit at fixed intervals for the rest of the beneficiary’s life.^[4] The amount paid at each interval may be calculated based on the annuitant’s current age and life expectancy. Of course, the retained asset account set up in the beneficiary’s name will eventually run out of money if the beneficiary lives longer than expected, at which point payments will cease.^[1]

The individual payouts for a lifetime annuity can be fairly small depending on the beneficiary’s expected lifespan but this type of annuity can provide a guaranteed income stream potentially lasting for their entire life. Additionally, many policies come with a guaranteed period lasting 10 to 20 years, during which contingent beneficiaries chosen by the annuitant can collect payments if the annuitant dies earlier than expected.^[4]

What Are the Benefits of a Life Insurance Annuity?

One of the major benefits of purchasing a life insurance annuity is that the regular payments to your beneficiaries over an extended period of time may more closely resemble your salary than a single lump sum. This may be appealing since one of the main purposes of life insurance is to replace your income for your dependents after you die.

A life insurance annuity may also be preferable if you have beneficiaries who are still young or otherwise financially immature because it may be easier for them to manage the death benefit and spend it wisely if they receive it gradually rather than all at one time.

What Are the Drawbacks?

Since the death benefit payment is drawn out over an extended period of time, a life insurance annuity may not be ideal if you expect your beneficiaries to need a significant influx of money upon your death. For example, if your family doesn’t have enough money saved up to pay for your funeral out of pocket, then an installment-based payment plan could leave your loved ones in a difficult spot financially even after they file a life insurance claim.

In addition, you should note that life insurance annuities tend to earn interest at a relatively low rate. For this reason, it may be better to take a lump-sum payment and put that money toward more profitable investments than to receive several smaller payments over the course of several years.^[5] Finally, there may be more productive ways to set up younger beneficiaries for financial success, according to Vonda Copeland, the owner of Copeland Insurance Agency.

“In complex situations, a trust funded by life insurance may be better than an annuity,” Copeland said in a message to SmartFinancial. “Trusts specify how and when proceeds are distributed, which can be important if beneficiaries lack financial maturity.”

How To Get Life Insurance Annuities

You should compare quotes from at least three to five life insurance companies before settling on a policy with an annuity payment structure. As you request quotes, you should be prepared to give information like your age, sex, health status and more. If you plan on contacting insurance carriers one by one, you should also be prepared for a long and tedious process.

That’s why you should comparison shop through SmartFinancial instead for a streamlined process. After answering a few questions, you’ll be connected with agents who can help you shop for the right policy for your circumstances. Compare life insurance quotes for free by clicking here.