# Whole Life Annuity: What It is, How It Works, Example

![Two annuitants sit on a park bench and use a laptop computer and check the balance of their whole life annuity account.](https://www.investopedia.com/thmb/Oy0K1U7Q2_KwO47kl5_F9OUZRh4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/WholeLifeAnnuityWhatItisHowItWorksExample-6c93b83f50aa434b9d4348951583bb15.jpg)

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> **Definition**
>
> A whole life annuity is a financial product sold by an insurance company thati provides regular income for life starting at a specific age.

## What Is a Whole Life Annuity?

A whole life annuity, also known as a [life annuity](https://www.investopedia.com/terms/l/lifeannuity.asp), is a financial product sold by insurance companies; it gives out monthly, quarterly, semi-annual, or annual payments to a person for as long as they live, beginning at a stated age. Annuities are usually purchased by investors who want to secure an [income stream](https://www.investopedia.com/terms/p/passiveincome.asp) during retirement.

### Key Takeaways

*   Annuities are insurance financial products that can be structured to pay a policyholder for a specific amount of time, or for as long as the policyholder and their spouse are alive.
*   A whole life annuity is an annuity that pays a person for their lifetime, starting at an age agreed upon in the contract.
*   The payment schedule can vary and can be as often as monthly or as infrequently as on an annual basis.
*   Annuities can either be paid out at a fixed rate that holds steady regardless of how the underlying investments perform, or at a variable rate, meaning the rate changes based on the performance of the underlying investments.
*   Most variable annuities allow the policyholder to invest in a variety of funds in order to build a diversified portfolio.

## How a Whole Life Annuity Works

Annuities can be structured to make payments for a fixed amount of time, commonly 20 years, or make payments for as long as the [annuitant](https://www.investopedia.com/terms/a/annuitant.asp) and their spouse is alive. [Actuaries](https://www.investopedia.com/articles/professionals/090513/day-life-actuary.asp) work with insurance companies to apply mathematical and statistical models to assess risk when determining policies and rates.

The [accumulation period](https://www.investopedia.com/terms/a/accumulationperiod.asp) occurs as payments are being made by the buyer of the contract to the insurance company; the annuitization phase occurs when the insurance company makes payments to the annuitant.

At the end of the term, the value in the account would be turned into a stream of payments in what's called the [annuitization phase](https://www.investopedia.com/terms/a/annuitizationphase.asp).

## Special Considerations

Annuities can be structured generally as either fixed or variable. [Fixed annuities](https://www.investopedia.com/terms/f/fixedannuity.asp) provide regular periodic payments to the annuitant. [Variable annuities](https://www.investopedia.com/terms/v/variableannuity.asp) allow the owner to receive greater future cash flows if investments within the annuity fund do well and smaller payments if its investments do poorly.

Most variable annuities let you invest in a variety of assets, mainly stock [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp). This provides for a less stable cash flow than a fixed annuity but allows the annuitant to reap the benefits of strong returns from their fund's investments.

There are no IRS contribution limits, and any earnings are not taxed until withdrawn. Withdrawals of taxable amounts from an annuity are subject to ordinary income tax and, if taken before age 59½, may be subject to a 10% IRS penalty.

Agents or brokers selling annuities need to hold a state-issued life insurance license, and also a securities license in the case of variable annuities. These agents or brokers typically earn a [commission](https://www.investopedia.com/terms/c/commission.asp) based on the [notional value](https://www.investopedia.com/terms/n/notionalvalue.asp) of the annuity contract.

## Example of a Whole Life Annuity

Assuming a 6% rate of return for all years, a $100,000 lump-sum investment over 20 years in a taxable account would be worth $222,508 at the end of the term. A [tax-deferred](https://www.investopedia.com/terms/t/taxdeferred.asp) variable annuity pre-tax (0.25% annual annuity charge) would be worth $305,053 at the term's end, and a tax-deferred variable annuity post-tax, assuming lump-sum withdrawal (0.25% annual annuity charge), would be worth $239,436.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Publication 575, Pension and Annuity Income](https://www.irs.gov/pub/irs-pdf/p575.pdf)," Page 33. Accessed June 11, 2021.
>     
> 2.  FINRA. "[Insurance Agents](https://www.finra.org/investors/learn-to-invest/choosing-investment-professional/insurance-agents)." Accessed June 11, 2021