What Is a Life Insurance Annuity? (and What It’s Not)
A life insurance annuity (sometimes called annuity life insurance) isn’t really a type of policy you can buy. Instead, it’s a payout option you may have from a life insurance policy. When a life insurance policy pays the death benefit to the beneficiary, he or she may have the choice to receive the money as a series of guaranteed payments over time rather than a single lump sum.
This setup works much like a traditional annuity, but with an important difference: you don’t purchase it during your lifetime. It only comes into play after a policyholder passes away, shaping how their death benefit is distributed.
How Does an Annuity Life Insurance Payout Work?
When a life insurance policy pays out, the default option is usually a lump sum. But some insurers let beneficiaries choose an annuity payout instead. With this option, the death benefit is divided into a series of scheduled payments — monthly, quarterly, or annually — for a set period of time or even for life.
This approach can make the payout feel more manageable and provide a steady stream of income, especially if the beneficiary is concerned about overspending a large lump sum.
Example of an Annuity Life Insurance Payout
Let’s say your Mom had a $500,000 life insurance policy when she died, and you are named as the beneficiary. Instead of taking the entire $500,000 at once, you might elect to receive $25,000 per year for 20 years. The exact payment amount depends on factors like the death benefit size, interest rates, and the length of the payout period.
Types of Life Insurance Annuities: Fixed-Period vs Lifetime
When beneficiaries choose an annuity payout, they usually have two main structures to consider:
Fixed-Period Life Insurance Annuity
With this option, the insurer pays out the death benefit in equal installments for a set number of years (for example, 10, 20, or 30 years). Payments stop once the period ends, even if the beneficiary is still living.
- Works well if the goal is predictable income for a limited time.
- Total payout is tied directly to the original death benefit plus any interest credited during the payout period.
Lifetime Life Insurance Annuity
This option guarantees payments for as long as the beneficiary lives, no matter how long that might be.
- Provides long-term financial security since payments never run out.
- However, if the beneficiary passes away earlier than expected, the insurer may keep any remaining balance unless the contract includes a “period certain” or joint beneficiary option.
Note : Guarantees are based on the claims paying ability of the issuer
Life Insurance Annuity vs. Conventional Life Annuity: Key Differences
At first glance, a life insurance annuity and a conventional annuity may sound similar. Both provide structured, steady payments over time. But the way they work – and when they come into play – is very different. Here are some key distinctions between a life insurance annuity payout and a conventional annuity.
Life Insurance Annuity
- Begins after the insured person passes away.
- Funded by the life insurance death benefit.
- Chosen by the beneficiary as a payout option.
- Payments may last for a set period or the beneficiary’s lifetime.
Conventional Annuity
- Purchased during a person’s lifetime, usually to create retirement income.
- Funded by the individual’s contributions (either a lump sum or multiple deposits).
- Payments begin at a future date the annuity owner selects.
- Designed as an income strategy while the policyholder is living.
- Come in many different structures, like single premium immediate annuities, and variable annuities.
In short, a life insurance annuity is about how a death benefit is distributed, while a conventional annuity is about funding retirement while you’re alive.
Should Beneficiaries Choose a Life Insurance Annuity Payout?
Choosing an annuity payout instead of a lump sum depends on the beneficiary’s needs, financial habits, and long-term financial goals. Some prefer the security of steady income, while others value having full access to the funds right away.
It’s best to speak to a financial professional about your particular situation, as there are pros and cons for life insurance annuity payouts and life insurance lump sum payouts.
Here are some considerations to keep in mind:
| Benefits of receiving annuity life insurance | Drawbacks of receiving annuity life insurance |
|---|---|
Provides steady, predictable income | No access to a full lump sum for large expenses |
Helps prevent overspending all at once | Payments may stop early if beneficiary dies without a period-certain option |
Can last for a lifetime, depending on structure | Inflation may erode the value of fixed payments over time |
Adds peace of mind for long-term planning | Limited flexibility compared to investing or managing a lump sum |
FAQs on Life Insurance Annuity
Final Thoughts on Life Insurance Annuities
A “life insurance annuity” isn’t a product on its own but a payout option that can shape how a policy’s death benefit is received. Choosing steady installments instead of a lump sum can provide structure, predictability, and peace of mind – though it also means giving up immediate access to the full amount.
If you’re weighing payout choices, it helps to think about your financial needs, spending habits, and long-term plans. Ethos can walk you through life insurance basics and help you understand the options available when it comes time to protect your loved ones. Or, if you’re looking for protection now, it’s easy to get started.
