How Does Life Insurance Annuities Work?

A life insurance annuity is a financial contract between an insurance company and a customer.  The customer pays a sum of money to the insurance company and in return, usually is guaranteed to receive a regular payment of money over a specified period of time.  There are many different types of life insurance annuities, each designed for different financial purposes.

The insurance company then invests the money a customer pays into the financial markets, to make a profit.  In return, the investor usually receives a regular payment of money for a specified period of time from the insurance company.

• Annuity payments can be immediate or deferred, fixed or variable.  A single premium immediate annuity, for example, is an annuity in which payments of a fixed amount begin immediately.  In a single premium deferred annuity, guaranteed fixed amount payments begin at some point in the future, often at retirement age.


• Variable annuities also are available with immediate or deferred payment dates.  Payment amounts for these annuities depend on the rate of return on investments.  Clients may receive a higher rate of return with variable annuities if the market performs well, but they also assume the risk of low or even no return at all.


• A combination of fixed and variable annuities is the equity indexed annuity.  This investment offers a fixed rate of return, with additional parts of the return fixed to investments.

The amount of the original investment, current and future stock and bond market performance and number of years until retirement affect whether an annuity should be part of an investment portfolio.  Annuities can be complicated and confusing, so it is wise to consult a certified financial planner before investing.