Why People Buy Annuities: Income You Can't Outlive

The core reason: may provide income for life

Most people buy annuities because they want income that lasts as long as they live, no matter how long that is. An annuity converts a lump sum of money into a stream of regular payments — monthly, quarterly, or annually — that continues until death. Unlike savings or investments, which can run out, an annuity is a contract with an insurance company that promises to keep paying you for life.

This matters most to people who worry about outliving their money. If you retire at 65 with $500,000 saved and live to 95, you need that money to stretch 30 years. A financial advisor might suggest you withdraw 4 percent per year, but that is still a guess about how long you will live and what returns the market will deliver. An annuity removes both guesses: the insurance company takes the risk instead of you.

Key Takeaways

• The primary reason people buy annuities is to receive may provide income for the rest of their life, regardless of how long they live.
• Annuities shift the risk of living too long from you to the insurance company, which pools risk across many customers.
• A deferred annuity lets you invest money now and start taking payments later, often at retirement age.
• An when ready annuity converts a lump sum into payments that begin within months, and is most common among people who have just retired.
• The trade-off for lifetime income is that you give up access to the original money and usually cannot change the payment amount once it starts.

How the insurance company makes this work

An insurance company can promise lifetime payments because it pools risk across thousands of customers. Some people die at 75, some at 95, some at 105. The company uses actuarial tables — historical data on how long people of different ages typically live — to calculate how much it can safely pay each month. It invests the lump sums it receives and uses those returns, plus the money from customers who die earlier, to fund payments to those who live longer.

This is why the monthly payment amount depends on your age when you buy the annuity. A 55-year-old buying an when ready annuity will receive a smaller monthly check than a 75-year-old buying the same annuity with the same lump sum, because the 55-year-old is statistically likely to collect payments for 20 or 30 more years. The older you are, the higher the monthly payment.

when ready annuities versus deferred annuities

An when ready annuity is what most people picture: you give the insurance company a lump sum (often $100,000 to $500,000, though amounts vary), and payments begin within a few months. This is the choice for someone who has just retired and wants to convert savings into a paycheck. You stop worrying about market timing or investment decisions; the money arrives on schedule.

A deferred annuity works differently. You invest money now, it grows tax-deferred inside the contract, and you do not take payments until a future date — often 10, 20, or 30 years later. Some people use deferred annuities as a savings vehicle that guarantees a certain payment at retirement, locking in that income stream decades in advance. Others use them to delay taking Social Security or other income until a later age.

What you give up in exchange for lifetime income

The certainty of lifetime income comes with real costs. Once you buy an when ready annuity and payments begin, you typically cannot change the payment amount, even if inflation erodes its purchasing power or your circumstances change. If you need a large sum of money for a medical emergency, you cannot withdraw it from the annuity. The money is gone from your control.

If you die shortly after buying the annuity, your heirs receive nothing — the remaining balance stays with the insurance company. Some annuities offer a "period certain" option that guarantees payments for a set number of years (say, 10 or 20) even if you die, but this reduces your monthly payment. There is also the risk that the insurance company itself fails, though state insurance guaranty funds protect annuity holders up to certain limits (the limit varies by state, typically $100,000 to $250,000 per person per company).

Who typically buys annuities and why

People in their late 60s and 70s are the most common buyers, especially those who have just retired or are about to. They have accumulated savings through a 401(k), an IRA, or a pension lump-sum payout, and they want to convert part of it into a reliable monthly income that covers basic living expenses. An annuity often covers rent or mortgage, utilities, and groceries — the non-negotiable costs — while other savings or Social Security cover discretionary spending.

Some people buy annuities with money they inherited, wanting to turn an unexpected lump sum into predictable income rather than managing it as an investment. Others use them strategically to delay Social Security: if you buy an annuity at 62 and live off its payments until 70, you can then claim Social Security at a higher rate, since benefits increase roughly 8 percent per year between 62 and 70.

The role of inflation and fixed payments

Most when ready annuities pay a fixed amount each month for life. If you buy an annuity at 65 and receive $2,000 per month, you will still receive $2,000 per month at 85 and 95. Over 30 years, inflation erodes what that money can buy. Some annuities offer a cost-of-living adjustment (COLA) that increases payments by a set percentage each year, typically 2 or 3 percent, but this reduces the starting payment amount.

This is why most financial advisors suggest using an annuity to cover only essential expenses — the portion of your budget that will not change much over time. Discretionary spending, travel, and gifts are better funded from investments that can grow and keep pace with inflation.

Comparing annuities to other income sources

Social Security is the closest thing to an annuity: it is a may provide payment for life, adjusted annually for inflation, and you cannot outlive it. The difference is that Social Security is earned through payroll taxes over a working life, while an annuity is purchased with savings you already have. Many people use both: Social Security covers baseline expenses, and an annuity covers the gap between Social Security and total living costs.

A pension from a former employer works similarly to an annuity, providing may provide lifetime income. If you have a pension, you may not need an annuity. If you do not have a pension and Social Security alone is not enough, an annuity can fill the gap. Some people buy a partial annuity — converting only part of their savings into may provide income — and invest the rest, balancing certainty with growth potential.

Frequently Asked Questions

What is the difference between an annuity and a life insurance policy?

Life insurance pays a lump sum to your heirs when you die; an annuity pays you regular income while you are alive. They serve opposite purposes. Insurance protects dependents from your early death; an annuity protects you from living too long and running out of money.

Can I buy an annuity with money from a 401(k) or IRA?

Yes. You can roll over funds from a 401(k) or IRA into an annuity without triggering when ready taxes, though the annuity payments themselves are taxed as income when you receive them. This is a common way to convert retirement savings into may provide income.

What happens to my annuity if the insurance company goes out of business?

State insurance guaranty funds protect annuity holders if an insurance company fails. The protection limit varies by state, typically $100,000 to $250,000 per person per company. For larger annuities, you can spread the purchase across multiple insurers to stay within the limits.

Should I buy an annuity if I have a pension?

Probably not, unless your pension does not cover all your essential expenses. A pension already provides the main benefit of an annuity — may provide lifetime income. An annuity makes more sense if you have no pension and Social Security alone leaves a gap in your budget.

Can I get my money back if I change my mind after buying an annuity?

Most when ready annuities cannot be surrendered or reversed once payments begin. Some annuities have a surrender period (typically 5 to 10 years) during which you can withdraw money, but you will pay a surrender charge. Always read the contract before buying.