Which Types of Annuities Require You to Pay Premiums

Most annuities require you to pay premiums, but the timing and structure vary by type

Nearly all annuities require premium payments — money you give to an insurance company in exchange for future income or growth. The main difference is when you pay. Some annuities ask for one lump sum upfront. Others let you pay over months or years. A few rare types require no payment from you at all because they're funded by a settlement or lawsuit judgment. Understanding which type matches your situation helps you plan your cash flow and compare costs across products.

The annuity company uses your premiums to invest the money (in stocks, bonds, or other assets depending on the product) or to reserve funds for may provide payments later. How much you pay, how often, and what happens to that money are the three things that separate one annuity type from another.

Key Takeaways

• when ready annuities and deferred annuities both require premiums, but when ready annuities convert your lump sum into income right away, while deferred annuities let your money grow before payments start.
• Fixed annuities require premiums and may provide a set interest rate, while variable annuities require premiums but tie your returns to market performance.
• Indexed annuities require premiums and link your growth to a market index like the S&P 500, with a floor that protects you from losses.
• Structured settlement annuities and lottery annuities require no premium from you because a court or lottery commission funds them directly.
• Some annuities accept single premiums while others accept flexible or periodic premiums, which affects how much control you have over funding.

when ready annuities and the single premium model

when ready annuities require a single lump-sum premium, usually between $50,000 and $500,000, though amounts vary by insurer. You hand over the money, and the insurance company begins sending you income within 30 days or at the start of the next month. There is no growth phase — the company calculates your monthly or annual payment based on your age, the premium amount, and how long you want the income to last (your lifetime, a set number of years, or a combination).

This type works best if you have a large sum sitting in a retirement account or savings and want to convert it into predictable paychecks. The trade-off is that once you buy the annuity, you cannot get your principal back — the insurance company owns it and uses it to fund your payments and those of other annuity holders.

Deferred annuities and flexible premium structures

Deferred annuities delay income until a future date you choose, often years or decades away. They can accept premiums in different ways: a single lump sum, regular monthly or annual contributions, or a mix of both. This flexibility appeals to people who are still working and want to build retirement savings gradually.

With a deferred annuity, your premiums go into an account that grows tax-deferred. You pay nothing to the insurance company beyond the premium itself — there are no separate monthly fees in most cases, though some products charge annual charges tied to the account value. When you reach your chosen date (or when you decide to start), the insurance company converts your accumulated balance into income payments.

Fixed annuities and may provide rates

Fixed annuities require premiums and promise a set interest rate for a stated period, usually three to ten years. The insurance company guarantees both the rate and your principal — you cannot lose money to market downturns. In exchange, your growth is capped at whatever rate the company offers, which is typically lower than stock market returns over long periods.

Fixed annuities usually accept either a single premium or flexible premiums over time. If you choose flexible premiums, you might contribute $500 or $1,000 per month for several years, and each contribution earns the same may provide rate. This appeals to conservative investors who prioritize safety over growth potential and want to know exactly what their money will be worth at a future date.

Variable annuities and market-linked returns

Variable annuities require premiums but tie your returns to the performance of investment accounts (called subaccounts) that you choose — similar to mutual funds. If the stock market rises, your account can grow faster than a fixed annuity. If the market falls, your account falls too. The insurance company does not may provide a rate or protect your principal.

Variable annuities typically charge annual fees ranging from 0.5% to 3% of your account value, depending on the features you select. They accept both single and flexible premiums. Many variable annuities also offer optional riders — add-on features you pay extra for — that provide income guarantees or death benefits even if your account loses value. These riders increase your annual costs but reduce your risk.

Indexed annuities and market-linked growth with a floor

Indexed annuities require premiums and link your growth to a market index like the S&P 500 or Nasdaq-100. They offer a middle ground between fixed and variable: if the index rises, your account grows (though usually with a cap on how much you can earn). If the index falls, your account does not fall below a floor, typically 0% to 3%, meaning you keep your principal or a small may provide minimum.

Indexed annuities accept single or flexible premiums. They charge annual fees, though often lower than variable annuities. The trade-off is complexity — the way the insurance company calculates your returns (called the crediting method) varies widely and can be hard to compare across products. Common methods include point-to-point (comparing the index value on your start date to your anniversary date) and monthly averaging (smoothing out volatility by using average index values).

Structured settlement and lottery annuities with no premium from you

Structured settlement annuities and lottery annuities are rare cases where you pay no premium. A court orders a defendant or insurance company to fund a structured settlement annuity as part of a lawsuit judgment. A lottery commission funds a lottery annuity when you win a large prize. In both cases, the funding source (the defendant, insurer, or lottery) pays the insurance company to create the annuity in your name.

You receive income from these annuities for life or a set term, but you never paid for them. If you later want to sell your future payments for a lump sum of cash, you can work with a factoring company, though you will receive less than the full value of the remaining payments.

How premium payment frequency affects your costs

The way you pay premiums — in one lump sum or over time — can affect the total cost of your annuity. Single-premium annuities are straightforward: you pay once, and the insurance company invests or reserves that amount. Flexible-premium annuities let you spread payments over months or years, which can feel easier on your budget but may result in slightly lower returns because not all your money is invested from day one.

Some annuities also charge surrender charges if you withdraw money during the first five to ten years. These charges are a percentage of your withdrawal amount and decrease over time. Understanding your annuity's surrender period is important if you think you might need access to your money before your income start date.

Frequently Asked Questions

Do all annuities require a premium payment?

Almost all annuities require a premium, but structured settlement annuities and lottery annuities are funded by a court or lottery commission, not by you. For every other type — when ready, deferred, fixed, variable, and indexed — you must pay a premium to the insurance company.

Can I pay my annuity premium in installments instead of a lump sum?

Many deferred annuities accept flexible or periodic premiums, allowing you to contribute monthly or annually over time. when ready annuities typically require a single lump sum because they convert your payment into income right away. Check with the specific annuity product to see which payment methods it accepts.

What happens to my premium if I die before my annuity starts paying?

With a deferred annuity, your beneficiary usually receives the account balance you have built up. With an when ready annuity, it depends on the payout option you chose — if you selected a life-only option, the insurance company keeps the remaining balance. If you chose a period-certain or joint-survivor option, your beneficiary receives payments for the remaining term.

Are there fees on top of my premium payment?

Fixed annuities typically charge no annual fees beyond the premium itself. Variable and indexed annuities charge annual fees (often 0.5% to 3% of your account value) that reduce your returns. Optional riders like income guarantees or death benefits add extra costs. Always ask for a fee breakdown before buying.

Can I get my premium back if I change my mind?

Most annuities have a free-look period of 10 to 30 days after purchase, during which you can return the contract and receive your full premium back. After that period, early withdrawals may trigger surrender charges. when ready annuities generally do not allow withdrawals once payments begin.