Do Annuities Expire or Can They Last a Lifetime?

Annuities are financial contracts established with an insurance company, designed to provide a stream of payments. They often serve as a tool for retirement planning, helping individuals convert a portion of their savings into a predictable income stream. A common question arises regarding whether these financial products “expire” or if they can provide payments indefinitely. The answer depends on the specific structure and terms of the annuity contract.

How Annuities Are Structured

Annuities typically involve two main phases: the accumulation phase and the payout phase. During the accumulation phase, an individual contributes funds to the annuity, either through a lump sum or a series of payments. These funds grow on a tax-deferred basis, meaning earnings are not taxed until they are withdrawn. The growth rate depends on the type of annuity.

The payout phase begins when the annuitant starts receiving income from the contract. The frequency and amount of these payments are determined by the annuity’s terms.

Annuities come in various types, including fixed, variable, and indexed annuities. Fixed annuities offer a guaranteed interest rate, providing predictable growth. Variable annuities allow direct investment in market-based subaccounts, offering growth potential but also exposure to market risk. Indexed annuities link their interest crediting to a market index, such as the S&P 500, often with principal protection.

Annuities Designed for Lifelong Income

Some annuities are specifically structured to provide income that lasts for the annuitant’s entire life, addressing the concern of outliving savings.

Single Premium Immediate Annuities (SPIAs) are one example; purchased with a lump sum, they begin providing regular income payments soon after purchase. These payments are guaranteed for the annuitant’s lifetime.

Deferred annuities can also be designed for lifelong income through a process called annuitization, where the accumulated value is converted into a stream of guaranteed payments.

Alternatively, many deferred annuities offer optional riders, such as Guaranteed Lifetime Withdrawal Benefits (GLWBs). A GLWB allows the annuitant to take guaranteed annual withdrawals for life, even if the annuity’s account value decreases to zero. This feature provides longevity insurance by ensuring a continuous income stream.

Annuities with Defined Terms or Potential Depletion

While some annuities offer lifelong income, others are designed with finite payment periods, meaning they can effectively “expire.”

A “period certain” payout option guarantees payments for a specific number of years, such as 10 or 20 years. If the annuitant lives beyond this specified period, payments cease. However, if the annuitant dies before the period certain ends, the remaining payments are made to a designated beneficiary.

Variable annuities, particularly those without lifetime income riders, can see their account value depleted. Since their value is tied to underlying investments, poor market conditions or substantial withdrawals can reduce the account balance. If the account value falls to zero, payments will stop.

Additionally, fixed-period annuities are structured to pay out the entire contract value over a predetermined number of years, after which payments conclude. This contrasts with lifetime income options.

Understanding Annuity Beneficiaries and Death Benefits

Annuity contracts include provisions for what happens upon the annuitant’s death.

Most annuities allow the owner to designate one or more beneficiaries who will receive any remaining value or guaranteed payments. The payout to beneficiaries can take several forms, including a lump sum, continued periodic payments, or annuitization for the beneficiary’s lifetime, depending on the contract terms and beneficiary’s choice.

The tax treatment of death benefits from annuities varies based on whether the annuity was “qualified” (funded with pre-tax dollars, like from an IRA or 401(k)) or “non-qualified” (funded with after-tax dollars).

For qualified annuities, the entire death benefit is generally taxed as ordinary income to the beneficiary because no taxes were paid on the original contributions or earnings. For non-qualified annuities, only the earnings portion of the death benefit is taxable as ordinary income, as the principal was contributed with after-tax funds.

Beneficiaries pay taxes on withdrawals as they receive them, rather than all at once, unless a lump sum is taken.

The SECURE Act of 2019 requires non-spouse beneficiaries of qualified annuities to distribute the inherited amount within 10 years of the annuitant’s death. Non-qualified annuities may have a five-year rule for distribution, though spousal beneficiaries have more flexible options.

Some annuity contracts, such as life-only payout options, may cease payments entirely upon the annuitant’s death, with no value passed to beneficiaries. However, many contracts include death benefit riders to ensure that remaining value is not lost.