A lifetime annuity converts a lump sum into income you cannot outlive. In exchange, you give up access to the money and pay fees that vary widely from one contract to the next. That trade can be worth making, but only after you understand what you are giving up, so read the contract, not the brochure.

An annuity is a contract with an insurance company: you pay in now, and it pays you an income later, often for life. If you buy one while still working, you pay into it for a set period (the term) during the accumulation phase, then switch to receiving income during the distribution phase.

Be cautious about who is selling it to you. Annuity fraud is common, contracts carry fees and penalties buried in the fine print, and the salesperson usually earns a commission. Compare the insurer's reputation, the fees, and the projected return against what you would get by investing the same money elsewhere.

How a lifetime annuity works

You pay the insurer a lump sum (a single-premium annuity) or a series of payments (a multiple-premium annuity). In return, the insurer guarantees you, and your spouse if it is a joint and survivor annuity, an income for life starting on a set date, no matter how long you live.

The money grows tax-deferred, so you owe no tax on the gains until payments begin. When you (or your survivor) die, the insurer generally stops paying and keeps whatever premium is left, unless the contract includes a return-of-premium or death benefit that pays your heirs the remainder.

Payments come monthly, quarterly, or annually. The older you are when payouts start, the higher each payment, because your life expectancy is shorter.

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Types of lifetime annuities

Annuities differ by when payments start and how much market risk you take.

Immediate annuities

Payments start right away. The payout can be fixed, adjusted annually for inflation (a COLA rider), or variable, tied to the performance of underlying investments.

Deferred annuities

Income starts at a future date. Until then the annuity is in its accumulation phase and can grow, which generally produces a higher payout than an immediate annuity bought with the same amount.

Fixed annuities

A fixed interest rate produces a steady, predictable income. This is the choice if you value stability over upside.

Variable annuities

Returns depend on investments you select, usually mutual funds. There is more risk and more potential upside, and at payout you can often choose fixed payments or variable ones that move with the investments.

Qualified longevity annuity contract (QLAC)

A QLAC is a deferred annuity bought with money from a 401(k), IRA, or similar qualified account. It pays monthly income later in life and is exempt from required minimum distribution rules, so it can defer the tax on that portion of your savings. There is a lifetime cap on how much you can move into a QLAC: $210,000 for 2026, up from the $200,000 base set in 2024, indexed for inflation in $10,000 steps.

Hybrid annuities

A hybrid splits your money between a fixed annuity, which guarantees a base payment, and a variable sub-account invested in mutual funds for growth potential.

Benefits of a lifetime annuity

Weighed against investing the same money in the market or an IRA, a few advantages stand out.

Guaranteed income for life

The insurer must pay the promised income for as long as you live. That guarantee is only as strong as the insurer, so buy from a company with high financial-strength ratings from AM Best, Moody's, Fitch, and Standard & Poor's.

A pension-like paycheck

With private pensions largely gone, an annuity can recreate the same predictable monthly deposit, which makes budgeting in retirement simpler.

Provisions for heirs and a spouse

Riders can add a death benefit that leaves money to heirs, or a joint and survivor feature that continues income to a surviving spouse. These add-ons raise the upfront cost.

Drawbacks of a lifetime annuity

Fees and commissions

Some annuities carry annual fees of 2% to 3%, higher than most other investments, covering administration and a mortality-risk charge. Because agents sell them on commission, often 7% or more, that cost is built into what you pay. Read the contract and total the annual cost before you sign.

Expensive riders

Every feature that makes an annuity attractive, from a spousal benefit to inflation protection, is a paid rider. Stacked together, riders and fees can erode the return significantly.

Illiquidity

Many contracts let you withdraw about 10% a year without a surrender charge during the surrender period (often six to eight years). Withdraw more, or withdraw before age 59 1/2, and you face a surrender charge, ordinary income tax on the gains, and a 10% early-withdrawal penalty. You usually cannot get the full balance back after purchase. Once you commit, you commit.

Scams and bad sellers

Commission-based sales attract bad actors pushing high-fee or unsuitable products. Slow down and get a second opinion from someone who is not paid on the sale.

Fluctuating returns

With a variable annuity, the value rises and falls with the market. In a down market the return can trail other investments, and your money is locked in.

How to buy a lifetime annuity

Annuities are a specialty product, so work with a fee-only financial advisor to find one with low fees and the features you actually need.

1. Talk to your advisor about how an annuity would fit your overall retirement plan.
2. Choose an annuity type that matches your income needs and risk tolerance.
3. Select an insurer. Major issuers include Allianz, New York Life, Nationwide, and Prudential.
4. Review every fee and commission before you sign, ideally with your advisor.

How to choose an annuity provider

• Check customer ratings. J.D. Power publishes insurer satisfaction ratings.
• Check financial strength. AM Best, S&P, and Moody's rate insurers' ability to pay claims decades from now. Pick one likely to outlast you.
• Get multiple quotes. Comparing rates, riders, and fees across insurers also gives you leverage.
• Use a fee-only advisor. Some salespeople call themselves advisors while earning a commission on what they sell you.

Estimating your annuity income

You can use an online calculator, but a rough manual estimate helps you compare contracts.

Step 1: Gather the inputs

• Initial investment amount
• Any annual contributions
• Number of years you will contribute
• The contract's interest rate

Step 2: Project the accumulated value

For year one, add the initial investment and first-year contribution, then apply the interest rate for the year-end balance. For each year after, add that year's contribution to the prior balance and apply the rate. Repeat to your target start date.

Step 3: Estimate the payout

Take the projected value at the start date and apply the provider's payout terms (fixed or increasing). Your age, life expectancy, and any inflation rider all change the final number. For a precise figure, work with a financial advisor who can factor in inflation and rate changes.

Costs to subtract

• Commissions. The seller takes a cut of your principal at purchase.
• Management fees. Underwriting and ongoing administration.
• Taxes. Withdrawals are taxed as ordinary income. If you funded the annuity with after-tax money, only the gains are taxed.

Final thoughts

Inside a well-built retirement plan, a lifetime annuity can be a reliable source of income that lasts as long as you do. Before buying, go through your options with a Certified Financial Planner who can tell you whether an annuity fits at all, and if so, how much of your savings belongs in one.

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