A lifetime annuity converts a lump sum into monthly payments that last as long as you live

A lifetime annuity (also called a straight life annuity) is a contract with an insurance company where you give them a sum of money upfront, and they send you a fixed payment every month for the rest of your life. The payment stops when you die. Unlike other annuity types that offer a set number of years of payments or return unused money to your heirs, a lifetime annuity prioritizes the highest monthly income — because the insurance company keeps whatever is left if you die early, they can afford to pay you more each month than other structures.

The trade-off is straightforward: you get the largest possible monthly check, but you have no death benefit and no way to pass money to your family if you die shortly after starting payments. This makes lifetime annuities most useful for people who have other assets to leave behind, or who are primarily concerned with income they cannot outlive.

Key Takeaways

  • A lifetime annuity pays you a fixed amount each month for as long as you live, and the payments end when you die.
  • The monthly payment is higher than other annuity types because the insurance company keeps unused funds if you die early.
  • You cannot change the payment amount, withdraw the remaining balance, or pass money to heirs — the contract is irrevocable.
  • Your payment amount depends on your age, gender, the size of your initial investment, and current interest rates when you purchase.
  • Lifetime annuities are often purchased with money from a pension lump-sum payout, an inheritance, or retirement savings.

How the payment amount is calculated

The insurance company uses three main factors to set your monthly payment: your age at purchase, your gender (women typically receive lower monthly payments because they live longer on average), and the amount you invest. A 65-year-old man who invests $500,000 will receive a different monthly payment than a 70-year-old woman with the same investment, because the company expects to pay the woman for fewer years.

Current interest rates also matter. When rates are higher, insurance companies can earn more on the money you give them, so they can afford to pay you more each month. When rates are low, your monthly payment shrinks. This is why the same $500,000 investment might produce different payments depending on when you purchase the annuity.

The insurance company publishes annuity payout tables that show the monthly income for different ages and investment amounts. You can request these from any insurance company before you commit. The payment is may provide by the insurance company's financial strength, not by any government fund — so the company's credit rating matters.

What happens to your money after you die

In a pure lifetime annuity, the insurance company keeps all remaining funds. If you invest $500,000 at age 65 and die at 68, the company has paid you only three years of monthly income and keeps the rest. This is the reason lifetime annuities pay more per month than other types — the company is betting on longevity risk, and some people will lose that bet.

Because of this feature, lifetime annuities are rarely purchased with money that was meant for heirs. They work best when you have already set aside money for your family through a will, life insurance, or other assets. Some people buy a lifetime annuity with part of their retirement savings and leave other accounts to their children.

If you want to protect your heirs, you can choose a different annuity structure instead — such as a period-certain annuity (which guarantees payments for a set number of years, and pays your heirs if you die before that period ends) or a joint-and-survivor annuity (which continues payments to a spouse after you die). These options pay less per month because the insurance company's risk is lower.

Lifetime annuities versus other retirement income sources

A lifetime annuity is not the same as a pension. A pension is a benefit your employer or former employer pays you based on your years of service. A lifetime annuity is something you purchase yourself with your own money. However, many people use a lifetime annuity to replace a pension they did not receive — for example, if they worked for a company that did not offer a pension plan, or if they received a lump-sum payout from a pension and chose to buy an annuity instead.

A lifetime annuity is also different from a regular investment account. If you invest $500,000 in stocks or bonds, you own the money and can spend it, change it, or leave it to heirs. With an annuity, you give up ownership in exchange for a may provide income stream. You cannot access the principal, and you cannot adjust the payment if your needs change.

Social Security is similar to a lifetime annuity in one way: both pay you a fixed amount each month for life. But Social Security is a government program funded by payroll taxes, not an insurance contract you purchase. And Social Security includes cost-of-living adjustments (COLA) that raise your payment most years, while a fixed lifetime annuity does not.

Inflation and fixed payments

A lifetime annuity pays the same dollar amount every month, regardless of inflation. If you receive $2,000 per month starting at age 65, you will still receive $2,000 per month at age 85 — but that $2,000 will buy less because prices have risen. Over 20 years, inflation can cut the purchasing power of your payment roughly in half.

Some insurance companies offer inflation-adjusted annuities that increase your payment by a set percentage each year (such as 2 or 3 percent) or by the actual inflation rate. These cost more upfront because your early payments are lower, but your later payments are higher. The choice between a fixed annuity and an inflation-adjusted one depends on how long you expect to live and how much inflation concerns you.

Because of inflation risk, many financial advisors suggest using a lifetime annuity for only part of your retirement income — enough to cover essential expenses like housing and food — and keeping other money in investments that can grow and adjust over time.

When people typically buy lifetime annuities

Lifetime annuities are most common in three situations. First, when someone receives a lump-sum payout from a pension plan and wants to convert it into may provide monthly income. Second, when someone inherits a large sum and wants to turn part of it into reliable income. Third, when someone reaches their 70s or 80s and wants to lock in a high payment based on their age.

The decision to buy an annuity is personal and depends on your health, your other assets, your family situation, and how much certainty you value. A person in excellent health with a long family history of longevity may benefit more from an annuity than someone with health concerns. A person with substantial other savings may not need the may provide income as much as someone who relies entirely on Social Security.

Frequently Asked Questions

Can I change my mind after I buy a lifetime annuity?

No. A lifetime annuity is irrevocable, meaning once you sign the contract and the insurance company begins paying you, you cannot cancel it, change the payment amount, or get your money back. Some states allow a short "free look" period (usually 10 to 30 days) after purchase, during which you can return the contract for a full refund. After that period ends, the decision is final.

What if the insurance company goes out of business?

Each state has a guaranty fund that protects annuity payments if an insurance company fails. The coverage limit varies by state but is typically $250,000 per person per company. Before you buy, check the insurance company's financial ratings through agencies like A.M. Best or Moody's to assess their stability.

Do I pay taxes on lifetime annuity payments?

Yes. If you bought the annuity with pre-tax money (such as a rollover from a traditional IRA or 401(k)), your entire payment is taxable as ordinary income. If you bought it with after-tax money, only the earnings portion is taxed. Your insurance company will send you a 1099-R form each year showing how much is taxable.

Is a lifetime annuity the same as an when ready annuity?

Not exactly. A lifetime annuity describes how long payments last (for your whole life). An when ready annuity describes when payments start (usually within 30 days of purchase). You can have an when ready lifetime annuity, or a deferred lifetime annuity that starts later. Most people use the terms interchangeably when discussing annuities purchased with a lump sum.

What if I need the money before I die?

In a standard lifetime annuity, you cannot access the principal. Some annuities include a small withdrawal option (such as 10 percent per year), but these are rare and reduce your monthly payment. If you think you might need access to your money, a lifetime annuity is not the right choice — consider keeping funds in an investment account instead.