Annuities are a fairly straightforward concept, but within this type of financial instrument are a myriad of variations and nuances that can be overwhelming.

Life insurance annuities are a unique product that combines elements of life insurance and an annuity contract. Unlike standard annuities, these are specifically designed to be purchased through or in conjunction with a life insurance policy. They provide a way to convert the death benefit or cash value of a life insurance policy into a stream of income during the policyholder’s lifetime.

How life insurance annuities work

When you purchase a life insurance policy with an annuity feature, you create a financial instrument that serves two primary purposes:

• Providing a death benefit to your beneficiaries.
• Offering a potential income stream for you during your lifetime.

Typically, this works through one of two primary methods:

• Converting the policy’s cash value into periodic payments.
• Using the death benefit to fund an annuity for beneficiaries.

Key characteristics of life insurance annuities

Let’s take a closer look at the key characteristics of this type of annuity…

1. Death benefit conversion

If you no longer need the full death benefit, you can convert a portion or all of it into an income stream. This allows you to access the value of your policy while you’re still alive.

2. Tax advantages

Life insurance annuities often come with significant tax benefits:

• Death benefits are typically tax-free to beneficiaries.
• Annuity payments can be structured to minimize tax liability.
• Growth within the policy is often tax-deferred.

Types of life insurance annuities

Here are some subcategories with their various attributes:

Whole life insurance with annuity option

• Provides lifelong coverage.
• Builds cash value over time.
• Can be converted to an income stream.
• Offers guaranteed minimum returns.

Term life insurance conversion

• Some term life policies allow conversion to a permanent policy with annuity features.
• Provides flexibility for changing financial needs.
• Allows continued coverage beyond the original term.

Unique benefits of life insurance annuities

These are the most common reasons people opt for this type of annuity.

• Flexibility in retirement planning
• Create a guaranteed income stream.
• Supplement other retirement income sources.
• Provide financial security for loved ones.

Living benefit options

• Some policies offer early access to funds in case of critical illness.
• Ability to take loans against the policy’s cash value.
• Potential for partial withdrawals.