# Understanding Life Annuities: Types, Benefits, and How They Work

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## What Is a Life Annuity?

A life [annuity](https://www.investopedia.com/terms/a/annuity.asp) is a financial product sold by [insurance](https://www.investopedia.com/terms/i/insurance.asp) companies that provides fixed, periodic [payments](https://www.investopedia.com/terms/p/payout.asp) to the [annuitant](https://www.investopedia.com/terms/a/annuitant.asp) for as long as they live. These products generally have two phases: the accumulation phase, during which the annuitant funds the annuity through periodic contributions or a lump-sum payment, often at retirement, and the annuitization phase, when payouts begin.

Life annuities are commonly used in retirement planning to guarantee or supplement income that cannot be outlived, though riders may be needed to continue benefits for a beneficiary. However, they can be affected by inflation and are generally irrevocable once payments start.

### Key Takeaways

*   Life annuities ensure a steady income stream by providing predetermined payouts until the annuitant's death, acting as a safeguard against outliving one's savings.
*   These insurance products transition from an accumulation phase, where annuitants fund their annuity, to an annuitization phase, where regular payments are made.
*   While providing financial security, life annuities are not indexed to inflation, potentially reducing purchasing power over time.
*   Consideration of riders is crucial for annuitants who wish to provide ongoing payments to beneficiaries after their death.
*   Professional advice is recommended when considering life annuities due to their complex nature and potential impact on retirement planning and taxes.

## Understanding the Mechanics of Life Annuities

Life annuities come in two different phases. The first is the [accumulation phase](https://www.investopedia.com/terms/a/accumulationphase.asp). This is the period when the buyer funds their annuity with [premiums](https://www.investopedia.com/terms/p/premium.asp) or with a [lump-sum](https://www.investopedia.com/terms/l/lump-sum-payment.asp) payment. The second stage is the income or the [annuitization](https://www.investopedia.com/terms/a/annuitization.asp) phase. During this period, the issuer or insurance company makes regular payments to the annuitant.

Once funded and enacted, the annuity makes periodic payouts to the annuitant, thus providing a reliable source of income. The issuer normally stops making periodic payments if the annuitant dies or if another triggering event occurs to close the annuity. But these payments may continue to the annuitant's [estate](https://www.investopedia.com/terms/e/estate.asp) or beneficiary if the annuitant had purchased a [rider](https://www.investopedia.com/terms/r/rider.asp) or other option on the annuity.

> **Important**
>
> Most life annuity payouts end when the annuitant dies. You may need a rider for beneficiaries to keep receiving payments.

Most annuities pay benefits monthly, but some offer quarterly, annual, or semi-annual payments. Payment schedules depend on the annuitant's needs or tax situation. Many retirees use life annuities to cover regular housing costs, like [mortgages](https://www.investopedia.com/terms/m/mortgage.asp) or rent, as well as health care, insurance, and medical expenses.

A life annuity provides guaranteed income but isn't adjusted for [inflation](https://www.investopedia.com/terms/i/inflation.asp), which is the rate of price increases. This means your [purchasing power](https://www.investopedia.com/terms/p/purchasingpower.asp) could decrease over time. A life annuity cannot be undone once it's started.

## Important Factors to Consider Before Purchasing a Life Annuity

Consult a reputable professional before buying an annuity. Annuities are complex and can significantly affect your [standard of living](https://www.investopedia.com/terms/s/standard-of-living.asp).

Because annuities have tax benefits, wealthy investors may use them to transfer money and reduce [tax](https://www.investopedia.com/terms/t/taxes.asp) impacts.

While life annuities are often used to provide or supplement retirement income, they are also used as a payment method in structured settlements and for lottery winners. For instance, if someone wins a lawsuit, they may be provided with a series of fixed, regular payments to the beneficiary. [Lottery](https://www.investopedia.com/managing-wealth/worth-playing-lottery/) winners may opt to take a lottery annuity rather than a fixed, lump sum when they win large jackpots. These payouts provide regular payments annually over a certain number of years. For example, a Mega Millions [jackpot](https://www.investopedia.com/terms/j/jackpot.asp) winner can choose to take 30 payments, with one paid out immediately. The remaining payments are distributed annually for the next 29 years.

## What Is the Difference Between a Fixed Annuity and a Variable Annuity?

A [fixed annuity](https://www.investopedia.com/terms/f/fixedannuity.asp) pays out a fixed percentage or interest rate on the owner's contributions to the annuity.

A [variable annuity](https://www.investopedia.com/terms/v/variableannuity.asp) pays out based on the performance of a [basket](https://www.investopedia.com/terms/b/basket.asp) of investments. Variable annuities offer the potential for higher returns or payouts when markets are performing well. However, they also contain more risk than fixed annuities, since the account could decline in value when the markets perform poorly.

## What Is a Joint Annuity?

A [joint annuity](https://www.investopedia.com/terms/j/jointandsurvivorannuity.asp) makes payouts until both spouses die, sometimes at a reduced amount after the death of the first spouse.

## What Is a Qualified Longevity Annuity Contract (QLAC)?

A [qualified longevity annuity contract](https://www.investopedia.com/terms/q/qualified-longevity-annuity-contract-qlac.asp) (QLAC) is a type of [deferred annuity](https://www.investopedia.com/terms/d/deferredannuity.asp) that is purchased using funds from a [qualified retirement plan](https://www.investopedia.com/terms/q/qrp.asp) or an [individual retirement account](https://www.investopedia.com/terms/i/ira.asp) (IRA). A QLAC provides monthly payments until death and is exempt from the [required minimum distribution](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) (RMD) rules from the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp).

## The Bottom Line

Life annuities provide guaranteed income for life, offering retirees financial stability by ensuring they don't outlive their savings. They can be funded through periodic payments made during working years or with a lump sum at retirement, with payouts typically offered monthly, quarterly, semi-annually, or annually.

However, they are generally not indexed to inflation, which can erode purchasing power over time, and once enacted, they're usually irreversible. Because of these long-term commitments, it's wise to consult a financial professional before purchasing, and riders can be added to extend benefits to beneficiaries after the annuitant's death.

> **Article Sources**
>
> 1.  Mega Millions. "[Difference Between Cash Value and Annuity](https://www.megamillions.com/difference-between-cash-value-and-annuity)."