How Does Life Insurance Annuities Work?


If you’re exploring financial planning options for your future or retirement, you may have come across the concept of life insurance annuities. These financial instruments offer a unique blend of life insurance and investment opportunities. 

In this blog, we’ll delve into life insurance annuities, discussing what they are, how they work, and the key distinctions between annuities and traditional life insurance policies.


What Is a Life Insurance Annuity?

Life insurance annuities provide a structured approach to paying out the death benefit to your loved ones. Instead of a single lump sum payment, the beneficiaries receive the payout in regular increments over a predetermined period. This option, known as a life insurance annuity, allows the beneficiaries to manage their finances more effectively after the policyholder’s passing. It provides you with two main benefits:

  1. Death Benefit: Similar to traditional life insurance, a life insurance annuity offers a death benefit. In the event of your passing, your designated beneficiary receives a lump-sum payment, providing financial support to your loved ones.
  2. Annuity Payments: The unique aspect of a life insurance annuity is the annuity component. With this, you receive regular payments during your lifetime or a specified period, depending on the annuity’s terms.


How Does a Life Insurance Annuity Work?

A life insurance annuity involves converting a beneficiary’s payout to a life annuity, allowing it to be paid out over time while earning interest on the remaining death benefit. The insurer pays out the benefit incrementally according to the agreed-upon terms with the beneficiary. 

Choosing a longer timeframe for the annuity can result in more earned interest and a higher overall payout. The interest earned during the annuity period may be subject to income tax, so it’s important to consult a tax professional for guidance.


Life Annuities vs. Life Insurance Policies

A life insurance annuity differs from a life annuity — though they sound similar.

  • Life annuities are standalone investment products that supplement your retirement income.
  • You pay premiums or a lump sum to fund the annuity, which gains interest at a fixed or variable rate. You receive payouts from a life annuity until you die.
  • On the other hand, a life insurance annuity is only available to beneficiaries of a life insurance policy who receive a death benefit.
  • Life insurance annuities pay out the death benefit to the beneficiaries in increments over a set period.


How Long Should a Life Insurance Annuity Last?

fixed annuities

There are two categories of life insurance annuities, determined by the duration for which the beneficiary commits to receiving annuity payments:

Fixed-Period Annuities

Fixed period annuities are commonly referred to as specific income or period certain annuities since they have a predetermined duration, typically spanning 10, 15, or 20 years. In the unfortunate event of the annuitant’s passing, the remaining payments will be directed to a designated beneficiary before the specified period concludes.

Lifetime Annuities

Lifetime annuities, also known as life income annuities, provide a steady stream of payments to the annuitant for their life. Many individuals opt for a guaranteed period within their lifetime annuity to mitigate the risk of premature death and potential loss of funds. In the event of the annuitant’s passing during the guaranteed period, payments will seamlessly transition to a designated beneficiary.


Pros and Cons of Annuity Life Insurance

life planning

Before opting for a life insurance annuity, consider the following advantages and disadvantages:


  • Lifetime Income: Annuities can provide a steady income stream during retirement, ensuring you won’t outlive your savings.
  • Tax Benefits: Annuities offer tax-deferred growth, potentially reducing your tax burden during accumulation.
  • Death Benefit: Your loved ones receive a death benefit if you pass away during the accumulation phase.
  • Customization: Annuities offer various payment options and can be tailored to your specific needs.


  • Fees and Expenses: Annuities may have fees that can affect your returns.
  • Lack of Liquidity: Annuities typically come with restrictions on accessing your money, which may not be suitable for everyone.
  • Complex Terms: The terms and options associated with annuities can be difficult, requiring careful consideration and understanding.

Work with Pronto Insurance!

If you want to explore life insurance annuities and how they can fit into your financial plan, consider working with Pronto Insurance. Our experienced professionals can help you navigate the world of annuities, select the right options for your needs, and ensure your financial future is secure. Contact us today to begin your journey toward financial peace of mind with our life insurance policies!

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