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What is a Life Insurance Annuity?

Life insurance death benefits can be quite large, so insurers often provide beneficiaries with numerous payout options. One of these is a life insurance annuity, paying the beneficiaries fixed amounts regularly to mimic a steady income stream. This article will explain what a life insurance annuity is, how it works, and how it differs from a life annuity.

What is a life insurance annuity? 

A life insurance annuity is a method of paying out a life insurance death benefit in a series of regular, fixed payments instead of a lump sum. Beneficiaries may opt for a life insurance annuity if they find it easier to manage smaller, regular payments than one large lump sum.1

Types of life insurance annuities

Beneficiaries can receive the death benefit payout via annuity in two ways:1

Fixed-period annuities 

Fixed-period annuities pay out the death benefit in regular payments over a specified period, such as 10 or 20 years. The insurer divides the death benefit amount by the payout period to determine the payout amounts. By the end of the fixed period, the death benefit will have been paid out in full. Furthermore, beneficiaries can choose other loved ones to receive payments if they pass away before the payout is complete.

Lifetime annuities

Lifetime annuities pay out the death benefit over the beneficiary’s lifetime. The insurer calculates the monthly payout amount based on the beneficiary’s age. Lifetime annuity payments may be smaller if the beneficiary’s life expectancy is long. However, the beneficiary can enjoy regular payments for life.

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Life insurance annuity vs. life annuity 

Although a life insurance annuity and life annuity may sound the same, they are actually different products. As mentioned earlier, a life insurance annuity is a payout method for a policy’s death benefit. Rather than a lump sum, it pays the death benefit in regular payments. A life annuity, on the other hand, is a retirement investment product. These provide fixed payments to the policyholder at regular intervals, offering a guaranteed income stream in retirement. Here are some key differences:1

Life insurance annuity Life annuity
Purpose To protect loved ones with a death benefit To access a steady income stream in retirement
Primary beneficiary The policyholder’s beneficiaries named in the policy The policyholder
Payment structure Payments made upon the policyholder’s death Payments made while the policyholder is alive

Should life insurance beneficiaries choose an annuity? 

An annuity payout option can make sense for your beneficiaries in several situations:

  • They don’t need to cover as many expenses right away
  • They want a steady income stream
  • They don’t want to handle a large sum of money
  • They want to avoid overspending
  • They want the potential to earn interest on amounts not paid out
  • They want simpler financial management

Learn more about life insurance

Death benefits don’t have to be paid out as lump sums. Life insurance annuities allow you to opt for periodic payments to offer an income stream. This makes the death benefit easier to manage and can potentially help unpaid amounts earn additional interest.

Aflac offers numerous life insurance policies, from term to whole life insurance, with several payout options available. Speak with an agent today to explore your options and get a quote.

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