What is a life insurance annuity?

While most life insurance policies pay out the insured's death benefit in a lump sum, some insurers provide beneficiaries with the option to receive their payout as an annuity, or in payments over time. Life insurance annuities, or installments, allow the unpaid death benefit to earn interest until it's fully paid out, and they allow for a steady stream of income for the beneficiary. A life insurance annuity is different from a life annuity, which is a retirement tool that pays out under certain qualifying events to the designated annuitant.

4 min to read

Explore Progressive's editorial standards for Answers articles to find out why you can trust the insurance information you find here.

How life insurance annuities work

While technically different from a life annuity investment product, a life insurance annuity involves converting a beneficiary's payout to a life annuity so it can be paid out over time and the remaining death benefit can continue earning interest. Once converted, the insurer can pay out the benefit incrementally as agreed upon with the beneficiary — for a set period until the payout is complete or until the beneficiary passes away.

Selecting a longer timeframe for your life insurance annuity can result in more earned interest and thus a higher overall payout. Beneficiaries don't have to pay the insurer if they choose the life insurance annuity payout option, but the interest earned during the annuity period might be subject to income tax. Consult with a tax professional to understand the tax implications of your particular circumstances.

What's the difference between life annuities vs. life insurance annuities?

A life insurance annuity is not the same as a life annuity, though insurance companies may offer both. A life annuity, also known as a lifetime annuity, is a retirement investment product you can purchase, either all at once or in separate installments over time.

A life annuity earns interest for a set timeframe or until certain conditions are met and then starts paying out to the annuitant (the annuity owner). The annuitant may be you as the person who purchased the annuity, or someone else you've designated, depending on the specific annuity product you have.

A life insurance annuity is a payout method that may be offered to the beneficiaries of a life insurance policy.

Life annuity vs. life insurance annuityLife annuity Life insurance annuity
Purpose Life annuity Provides income to the annuity owner, usually at retirement Life insurance annuityProvides funds to the policy's beneficiaries
When it pays outLife annuity Once the annuity owner decides to start receiving paymentsLife insurance annuityOnce the insured passes away
Who receives the benefitLife annuity The annuity owner or a selected beneficiary (if desired)Life insurance annuityThe named beneficiaries on the policy

Should life insurance beneficiaries choose the annuity option?

Life insurance annuities aren't available in all situations, so when you file a claim for a death benefit, ask about your payout options. Receiving a lump sum can make it possible to pay for burial expenses and estate costs, or other large financial needs you might have coming up. A lump sum payout can also be invested, allowing you to earn interest on your benefit with potentially more lucrative options than an annuity payout.

However, if you're not prepared to invest and manage a large lump sum payout, receiving a series of payments via annuity can make it easier to budget while still earning interest at a fixed rate. Again, a tax or financial advisor can help you with this decision.

Considering a life insurance policy of your own?

Online

You'll be asked questions, and then you'll choose your coverage amount and more.

Get a life insurance quote

Call a rep

A licensed representative from Progressive Life by eFinancial will talk you through your options.

Call 1-866-912-2477

Get a free life insurance quote online in minutes

Learn more about life insurance policies.

Have more questions? Browse articles by insurance type

See all articles by product

Please note: The above is meant as general information to help you understand the different aspects of insurance. Read our editorial standards for Answers content. This information is not an insurance policy, does not refer to any specific insurance policy, and does not modify any provisions, limitations, or exclusions expressly stated in any insurance policy. Descriptions of all coverages and other features are necessarily brief; in order to fully understand the coverages and other features of a specific insurance policy, we encourage you to read the applicable policy and/or speak to an insurance representative. Coverages and other features vary between insurers, vary by state, and are not available in all states. Whether an accident or other loss is covered is subject to the terms and conditions of the actual insurance policy or policies involved in the claim. References to average or typical premiums, amounts of losses, deductibles, costs of coverages/repair, etc., are illustrative and may not apply to your situation. We are not responsible for the content of any third-party sites linked from this page.

THE #1 INSURANCE WEBSITE

Copyright 1995 - 2024. Progressive Casualty Insurance Company. All Rights Reserved.

We offer insurance by phone, online and through independent agents. Prices vary based on how you buy.

ΔDiscount varies and is not available in all states or situations.

Insurance carrier website ranking by Keynova Group – Q4 2023 Online Insurance Scorecard.

Certain term life insurance policies for Arizona, Georgia, Indiana, Louisiana, Maryland, Michigan, Missouri, Ohio, Pennsylvania, Tennessee, Texas and Virginia residents are underwritten by Progressive Life Insurance Company.

Progressive Advantage Agency, Inc. (PAA) refers consumers seeking life insurance to eFinancial, LLC for placement with insurers offering this coverage. eFinancial and the insurers are not affiliated with Progressive and are solely responsible for their websites, products, and services. Information about you is subject to their privacy policies and may be shared with PAA and its affiliates for their marketing and other uses.

PAA and Progressive are not responsible for insurer or coverage selections, policies issued, claims, the content or operation of others' websites, or how others handle or use your information. Information you provide to others is subject to their privacy policies and website terms of use, and may be shared with us.

PAA receives compensation from eFinancial or its affiliate that may vary based on the number of applications taken by eFinancial and the policy you buy. Contact us for more details.