Guaranteed Lifetime Annuity: How They Work, When They Pay You

What Is a Guaranteed Lifetime Annuity?

A guaranteed lifetime annuity is a financial product that promises to pay its owner income on a regular basis for the rest of their life. Here is how guaranteed lifetime annuities work and how to decide if one is right for you.

How a Guaranteed Lifetime Annuity Works

Guaranteed lifetime annuities, sometimes called guaranteed lifetime income annuities, are contracts sold by insurance companies. Their main selling point is that the buyer will never have to worry about running out of money in old age. By contrast, some other types of annuities, known as period certain or fixed-period annuities, make payments for a limited span of time, such as five, 10, or 20 years.

The buyer of a guaranteed lifetime annuity pays the insurer either a lump sum of money (a single-premium annuity) or a series of premiums (a multiple-premium annuity). In return, the insurer agrees to provide the buyer—and their spouse or another person, in the case of a joint and survivor annuity—with a guaranteed income for life, regardless of how long they live.

Once the annuity owner (or their survivor) dies, the payments end and the insurance company generally gets to keep whatever money might be left. Some annuities, however, have a return-of-premium feature that will pay the annuity owner’s heirs any money that remains from the original premium. That could happen, for example, if the annuity owner dies early into the contract. Some annuities also provide a death benefit that works much like a life insurance policy.

Income from a guaranteed lifetime annuity is generally paid monthly, quarterly, or annually. The older the owner is when they begin receiving income, the higher their payments will be because their life expectancy is shorter.

In some sense, a lifetime annuity is a wager between the insurance company and the annuity’s owner. The insurer will be the winner if the owner dies before a certain point, while the owner will come out ahead if they surprise the insurer by living longer than expected. 

Types of Guaranteed Lifetime Annuities 

Insurance companies offer guaranteed lifetime annuities in a variety of forms. These are some of the basic types:

Immediate Annuity vs. Deferred Annuity

With an immediate annuity, the owner can begin to receive income right away. The amount of that benefit can either be fixed for life or, if the annuity has a cost-of-living adjustment (COLA) provision, adjust periodically for inflation. There are also immediate variable annuities that base a portion of their payout on the performance of underlying financial instruments like stocks, bonds, and mutual funds.

With a deferred annuity, the income stream will start at some agreed-upon point in the future. In the meantime, the annuity will be in what’s known as its accumulation phase. Deferring income can allow the account to grow in value, resulting in higher payouts than with an immediate annuity. The longer that income is deferred, the greater the potential accumulation. Immediate annuities have no accumulation phase.

Fixed Annuity vs. Variable Annuity

A fixed annuity will pay the annuity’s owner a predetermined interest rate on their money during the accumulation phase.

A variable annuity, on the other hand, will pay a return based on the investments that the owner has chosen for it, typically one or more mutual funds. When the payout phase begins, the owner may have a choice of receiving fixed payments or variable payments based on the ongoing performance of their investments.

In addition, there are hybrid annuities that allow the owner to hedge their bets by splitting their money between a fixed annuity and a variable annuity. 

Single Life Annuity vs. Joint and Survivor Annuity

A single life annuity stops paying income when the owner dies.

A joint and survivor annuity continues to pay income to another person (usually a surviving spouse) after the owner’s death. Because it is likely to have a longer payout phase, a joint and survivor annuity will typically pay less each month (or other time period) than a single life annuity.

Advantages and Disadvantages of Guaranteed Lifetime Annuities 

Guaranteed lifetime annuities can be an appropriate choice for people who want a regular source of income to supplement their Social Security benefits, pensions, or other investments. However, they also have some downsides.

For one, annuities can be expensive, with sales commissions and various ongoing fees. Many contracts make it costly—and sometimes impossible—to withdraw money early if the owner needs it. In many cases, the owner’s heirs will get nothing from the annuity after the owner dies unless a death benefit rider is added. Some insurance companies offer annuity contracts that get around these problems but usually at an added cost.

Finally, there’s the question of what “guaranteed” actually means. Annuities are not federally insured, as most bank accounts are. While state guaranty funds may offer some protection if an insurer defaults on its annuities, the best safeguard is to buy an annuity only from an insurance company with solid credit ratings from independent agencies like Moody’s and Standard and Poor’s.  

The Bottom Line

A guaranteed lifetime annuity can provide income for the rest of the owner’s life. It can also be designed to pay income to a surviving spouse or other person for the rest of their life. Guaranteed lifetime annuities can begin their payouts immediately or at some point in the future. The income they produce may be fixed for life, rise with the cost of living, or vary according to the performance of particular underlying financial instruments. Annuities can be expensive, however, and, depending on how long the owner lives and receives payments, may or may not prove to be a good investment.