Many annuity types exist, each with payout periods aligned with unique financial goals. If your priority is having a guaranteed income stream later in life, a lifetime annuity might be the right option.

Read on to explore the pros and cons of this popular annuity to better understand whether it's a good fit for you.

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What’s a lifetime annuity, and how does it work?

A lifetime annuity is a contract between you and the annuity provider — usually an insurance company. You begin by depositing a lump sum premium to open the contract, or smaller installments during a specified accumulation period. When the annuity matures, it moves into the annuitization period, and you begin receiving regular payments over a specific period. With a lifetime annuity, the payments continue until you die or the annuity passes to a beneficiary. 

Depending on the type of annuity you purchase, your contract will grow at a fixed or variable rate.

Here are some of the most common factors insurers consider when determining your annuity payments.

Age at the time of annuitization

Younger persons tend to live longer, so your payout amount is generally lower. Conversely, the payout period is usually shorter for older persons, meaning the payment amounts may be greater. 

For example, a 50-year-old and 60-year-old contribute $100,000 in the same fixed annuity with a 10-year maturity. When the payout phase begins, they are 60 and 70 years old, respectively. With all other factors being equal, the insurance company expects the younger person to receive 10 additional years' worth of payments, so they reduce the amounts. 

Initial contribution amount

The more you contribute to a fixed annuity, the more payments you will likely received at annuitization. Say person A deposits $50,000 into an annuity on the same day that person B deposits $100,000 in the same product. With all other factors equal, person B’s received payments will be twice as much as person A’s during the payout phase.

Payout option (single vs. joint life annuity)

With a joint life annuity, you can add another annuitant. However, joint annuities generally have lower payout options because they have to pay until the end of two lifetimes. 

Interest rates at the time of purchase

When you buy a lifetime income annuity, the higher the interest rates are, the faster your retirement savings will grow. Consider a fixed annuity to lock in during higher interest rate periods. If interest rates are low at your time of purchase, variable annuities may be the better choice if you are looking to potentially earn more on your money; however, they do not offer principal protection. Keep your eyes on the market.

Advantages and disadvantages of a lifetime income annuity

Lifetime annuities are long-term investments, so it’s essential to understand their benefits and limitations before committing to a principal. 

Pros

• Guaranteed lifetime income: Lifetime annuities offer the option to annuitize your contract which guarantees your monthly payments until you die. You never have to worry about outliving your retirement savings. 
• Stable, predictable payments: You’ll receive the same income every month, which helps with budgeting and planning. 
• Tax-deferred growth: Qualified annuities are purchased with pre-tax dollars. You defer your taxes on these funds until you make a withdrawal or annuitize your contract. Earnings on non-qualified annuities are also tax deferred until withdrawal. 

Cons

• Lack of liquidity: Many annuities charge a surrender fee for early withdrawal from your account. Additionally, the IRS applies a 10% penalty for early disbursement until age 59½. 
• Potentially lower returns: If you choose a fixed annuity, your rate is locked. If interest rates increase, you may miss an opportunity for higher earnings.
• Inflation risk: Like any other financial product, inflation can reduce the purchasing power of your payout. 
• Fees and costs: Some lifetime annuities have additional costs and fees that can reduce the profitability of your product. Make sure to read your contract terms before committing. 

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FAQ

How is income from an annuity taxed?

When an annuity is purchased with qualified money, the entire withdrawal amount is taxable since you bought it with pre-tax funds. If you purchase a non-qualified annuity with money that you’ve already paid taxes on, only your earnings are taxed — not your contributions.

What happens if I die early?

When you die, the annuity contract terms will determine if there are additional payments or a death benefit.  Some offer a death benefit for your beneficiaries, while others may stop payments entirely, so examine your contract to understand its provisions.

Can I outlive my annuity?

Unless you plan to live forever, you’ll never outlive a lifetime annuity. Most annuities pay for a certain fixed time period. However, if you have an annuity for life, payments continue until you die. 

Which type of annuity guarantees payments for life?

A lifetime annuity is one of the annuities that pays guaranteed income payments until the annuitant’s death. However, there are several other annuity types that can be customized to your needs:

• Immediate vs. deferred: An immediate annuity begins paying right after you open the account (typically within a month). A deferred annuity begins paying after a predetermined accumulation period, which can result in higher payouts as it provides the opportunity for your money to grow. 
• Single vs. joint: A single-life annuity pays until the annuitant’s death, while a joint life annuity continues to pay the other annuitant at the death of the first annuitant. 
• Qualifying vs. non-qualifying: Qualifying annuities are purchased with pre-tax dollars and so any withdrawals or payments are fully taxable. With a non-qualifying annuity, a person purchases the contract with after-tax money, so only earnings are taxed at withdrawal or payout. 
• Fixed vs. variable: With variable annuities, your account value is tied to the performance of the underlying investment options. Fixed annuities offer a steady rate throughout the life of the contract. A fixed index annuity earnings are tied to an index such as the S&P 500^®. You earn interest credits depending on the performance of the particular index. Additionally, most fixed index annuities have caps to protect earnings during market downturns. 

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This communication / article is for informational / educational purposes only.

It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.

The Gainbridge^® digital platform provides informational and educational resources intended only for self-directed purposes.

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Individual licensed agents associated with Gainbridge^® are available to provide customer assistance related to the application process and provide factual information on the annuity contracts, but in keeping with the self-directed nature of the Gainbridge^® Digital Platform, the Gainbridge^® agents will not provide insurance or investment advice.

_{1 Provided your account value hasn’t gone to $0 due to excess withdrawals.}

_{ParityFlex™ is issued by Gainbridge Life Insurance Company, Zionsville, Indiana. Products and/or features may not be available in all states. All guarantees are based on the claims paying ability of the issuing insurance company. Withdrawals are taxed as ordinary income and, if taken prior to age 59½, there may be a 10% federal tax penalty. Withdrawals may result in a surrender charge or a market value adjustment (MVA) and excess withdrawals may result in a reduction of future payments under the guaranteed lifetime withdrawal benefit.}