What is an income annuity?
An income annuity is an insurance contract that exchanges a lump sum of savings for a stream of guaranteed payments, running for life, for a set period, or both. Unlike money sitting in an account, that income cannot run dry: the insurer is contractually on the hook to keep paying no matter how long you live or what the markets do. Four main versions cover almost every situation: a SPIA for income starting almost immediately, a DIA for income you lock in now but delay for years, a fixed index annuity with a GLWB rider for growth first and income later while keeping some access to your money, and a QLAC for retirees using IRA dollars to push back required withdrawals. Which one fits depends mostly on when you need the income to begin and how much flexibility you are willing to trade away to get it.
The four types of income annuities
Four contracts cover almost every way to turn savings into guaranteed income, and each one solves a different timing problem. A single premium immediate annuity, or SPIA, pays the fastest. A deferred income annuity, or DIA, locks in a future paycheck on today's terms. A fixed index annuity paired with a guaranteed lifetime withdrawal benefit, or GLWB, grows your money first and lets you switch on income whenever you decide. A qualified longevity annuity contract, or QLAC, is a specialized version built specifically for IRA dollars and required minimum distributions.
Here is how the four line up against each other:
| Type | When income starts | Access to principal | Best for |
|---|---|---|---|
| SPIA | Within about 30 days | No, irrevocable | Replacing a paycheck immediately |
| DIA | Anywhere from 2 to 40 years later | No, irrevocable | Locking in tomorrow's income at today's terms |
| FIA with GLWB rider | Whenever you choose, often 5 to 15 years out | Yes, subject to surrender charges | Growth first, income later, with flexibility in between |
| QLAC | As late as age 85 | No, irrevocable | Cutting RMDs and insuring against outliving savings |
The right one for you comes down to timing more than anything else: how soon you need the first check, and how much access to the lump sum you are willing to trade away to get a bigger one.
Single premium immediate annuity (SPIA)
A SPIA is the simplest of the four. Hand the carrier a lump sum, commonly somewhere between $50,000 and $500,000, and payments begin within about 30 days. The insurer calculates your monthly check from your age, your gender, the payout option you pick, and prevailing interest rates at the time of purchase. Once that number is set, it does not move again unless you added a cost-of-living rider.
How much does a SPIA pay?
Payout size comes down mostly to age and where interest rates sit on the day you buy. Two people can deposit the identical amount and land on noticeably different monthly checks depending only on when they buy and how old they are.
A few patterns hold up consistently. Payouts rise with age, since the insurer expects fewer total payments the later you start. Men typically see a slightly higher monthly number than women at the same age and deposit, because average life expectancy differs by gender and the insurer prices to that difference rather than anything else about the buyer. As a purely hypothetical illustration, a $200,000 deposit into a life-only SPIA at 65 might land somewhere around $1,300 to $1,500 a month, with the same deposit at 75 potentially paying 30% to 40% more. Neither figure is a quote. Run your own numbers on the immediate annuity calculator, or get a live quote for your age, gender and deposit.
The mortality credit advantage
SPIAs consistently outpay comparably safe alternatives like bond ladders or CDs, and the reason is a mechanism called the mortality credit. When a large pool of people buys the same kind of contract, those who die earlier than expected effectively subsidize the payments still going out to those who live longer. Someone who buys a life-only SPIA and passes away a few years later has received far less than they deposited; that unused portion helps fund payments for policyholders who live well into their 90s.
As a hypothetical illustration only, that pooling effect is why a $200,000 SPIA might generate something like $1,400 a month, where a bond paying a hypothetical 5% would produce roughly $833 a month from the same balance, since a bond never spends down principal the way an annuity does. Neither number is a quote for a real product. The point is structural: an insurer can distribute principal alongside interest because it is pooling longevity risk across many contracts, and a bond ladder simply is not built that way.
Who should buy a SPIA?
A SPIA fits someone who needs income now, is not especially focused on leaving the deposit itself to heirs, and wants the simplicity of one fixed check they cannot outlive. The clearest candidate is a retiree whose fixed monthly bills exceed what Social Security and any pension already provide. A SPIA is built to close exactly that gap, permanently.
Deferred income annuity (DIA)
A DIA works like a SPIA in every respect except timing. You pay a premium now and the insurer locks in a future income amount, but the first check does not arrive for anywhere from 2 to 40 years, depending on how you set it up. Because the carrier gets to hold and invest your money longer before paying anything out, a given deposit buys meaningfully more future income through a DIA than the same deposit would through a SPIA starting today.
A hypothetical example
Picture someone who is 60 today, retiring at 65, who deposits $100,000 into a DIA with income scheduled to start at 65. Because the carrier holds the funds for five years before the first payment, that same $100,000 might generate something in the range of $900 to $1,000 a month starting at 65, compared with perhaps $650 to $700 a month from a SPIA bought outright at 60. Delay the start to 70 instead, and the same $100,000 might climb to roughly $1,400 to $1,600 a month, since the carrier now holds the money for a full decade before paying anything. None of these figures are quotes. They exist only to show how much the deferral period itself is worth.
The rate lock advantage
A DIA lets you lock in today's pricing for income that does not begin until later. If you expect rates to trend downward over the next several years, buying a DIA now secures whatever the carrier is offering today for a check that will not start for a while. That makes it a meaningful planning tool specifically in a falling-rate environment.
Who should buy a DIA?
DIAs suit people who have not stopped working yet, or whose Social Security and other near-term resources already cover the present, and simply want a specific future date locked in for guaranteed income to begin. They also work well as a bridge for someone delaying Social Security to maximize the eventual benefit: retire at 62, buy a DIA that starts paying at 70, live on other savings for the years in between, then receive a maximized Social Security check on top of the DIA income once both kick in.
Fixed index annuity with a GLWB rider
A fixed index annuity paired with a guaranteed lifetime withdrawal benefit is the most flexible of the four, because it combines a growth phase with a guaranteed income phase while keeping the underlying account accessible the whole time.
How the two-phase structure works
During the accumulation phase, commonly 5 to 15 years, your premium earns interest tied to a market index such as the S&P 500, with a 0% floor that keeps a bad index year from pulling your balance backward. Many contracts also track a separate figure, often called an income account or benefit base, that grows at a guaranteed roll-up rate, commonly somewhere between 5% and 8% a year. That benefit base exists only to calculate your eventual income; it is not money you can withdraw as a lump sum.
Once you move into the income phase, you activate the rider and start drawing a guaranteed lifetime withdrawal, calculated as a percentage of the benefit base. That percentage rises with your age at activation, so waiting longer to switch it on generally means a bigger check once you do.
A hypothetical example
Say a 58-year-old deposits $200,000 into a fixed index annuity with a GLWB rider carrying a hypothetical 6% annual roll-up. After 10 years, the benefit base has grown to roughly $358,000. At 68, the carrier's hypothetical payout rate for that age is 5.5%, which produces about $19,690 a year, or roughly $1,641 a month, guaranteed for life regardless of what the actual account value happens to be doing. If the index performed well along the way, the real account value could sit higher still, opening the door to lump-sum withdrawals on top of the guaranteed income. None of this is a projection for any specific product; it only shows the mechanics.
The key difference from a SPIA
Unlike a SPIA, that 58-year-old still has access to the account value throughout the accumulation years, subject to surrender charges in the earlier ones. A withdrawal for an emergency in year three is possible in a way it simply is not with a SPIA. That flexibility has a price: dollar for dollar, a GLWB rider typically pays less income than a SPIA bought at the same age, because the carrier is carrying both the growth-phase costs and the lifetime guarantee at once. Our income rider guide compares this structure across carriers in more depth.
Who should buy an FIA with a GLWB?
This structure fits someone roughly 5 to 15 years from retirement who wants to keep growing savings during that stretch, wants a guaranteed income floor to switch on later, and still wants the option to reach the account value if plans change. It is also a natural fit for anyone who likes the idea of guaranteed income but is uncomfortable with the irrevocable, one-way nature of a SPIA or DIA.
Qualified longevity annuity contract (QLAC)
A QLAC is a specialized DIA funded exclusively with qualified retirement money, meaning dollars from a traditional IRA, 401(k) or similar account. Congress created it specifically so retirees could use pre-tax retirement savings to buy guaranteed late-life income without those dollars counting toward required minimum distributions.
QLAC rules for 2026
- Lifetime premium limit: $210,000 across all of your qualified accounts combined, a figure the IRS indexes for inflation over time.
- Latest possible start date: age 85.
- RMD treatment: the QLAC premium is carved out of the IRA balance used to calculate required minimum distributions. Move $210,000 out of a $1,000,000 IRA into a QLAC, and the RMD calculation going forward runs off the remaining $790,000.
- Taxation: every QLAC payment is fully taxable as ordinary income, since none of that money was taxed on the way in.
A hypothetical example
Consider a 73-year-old with a $900,000 traditional IRA generating more in required distributions than she actually spends. She moves $210,000 into a QLAC with income starting at 85. Her RMD calculation now runs off $690,000 instead of $900,000, trimming her annual required distribution, and the tax bill attached to it, for well over a decade. At 85, the QLAC begins paying guaranteed monthly income, arriving right around the stretch of retirement when other savings are often thinnest and health costs tend to run highest.
Who should buy a QLAC?
QLACs suit retirees in their 70s who hold substantial IRA balances, do not need the full required distribution to cover living expenses, and want insurance against the specific risk of outliving their money past 85. It does double duty: trimming the current tax bill from distributions you do not need, while building a guaranteed income floor for the later decades of retirement.
How annuitization works
Annuitization is what actually happens under the hood any time a deferred contract's balance gets turned into an ongoing paycheck instead of staying a lump sum. Both a SPIA and a DIA rely on this same mechanism from day one, and most other deferred contracts can elect into it too, once their surrender window has closed.
Choosing to annuitize means giving up the lump sum in exchange for guaranteed payments. The carrier uses your accumulated value, your age, and the payout option you select to set a fixed payment amount. An exclusion ratio then determines how much of each payment counts as a tax-free return of your own cost basis versus taxable earnings.
In most cases, annuitizing cannot be undone. Once payments start, there is no reversing course or reclaiming the remaining principal. That permanence is exactly why a GLWB rider on a fixed index annuity has become popular with buyers who want guaranteed lifetime income without fully closing the door on their account value.
Single life vs. joint life payouts
Every income annuity requires a choice between a single life payout and a joint life payout, and that choice cannot be undone once income begins. It shapes both the size of your monthly check and how well protected a surviving spouse is afterward.
Single life
Payments continue for one person's lifetime and stop entirely at death. This option pays the most of any structure, since the insurer's obligation ends the moment you do. It makes sense when there is no spouse involved, when a surviving spouse already has ample income from other sources, or when a couple has deliberately decided other assets will support whoever is left.
Joint life
Payments continue across two lifetimes, typically a married couple, and keep going to the survivor once the first spouse dies. How much the survivor keeps receiving depends on the percentage selected at purchase:
- 100% joint survivor: the survivor keeps the full original payment. Starting income runs 8% to 15% lower than single life, depending on both spouses' ages.
- 75% joint survivor: the survivor keeps three-quarters of the payment. Starting income runs roughly 5% to 10% lower than single life.
- 50% joint survivor: the survivor keeps half the payment. The smallest reduction of the three, typically 3% to 7% below single life.
The right choice comes down to what else the surviving spouse would have to lean on. If Social Security, a pension or other savings would comfortably support the survivor alone, a 50% option lets the couple enjoy more income while both are alive. If the survivor would genuinely struggle without the full payment, a 100% joint survivor buys the most protection.
Income annuity payout options explained
Beyond choosing single or joint life, every income annuity asks you to pick a payout structure that determines what happens if you die earlier than expected.
Life only
The largest possible monthly check, with nothing left over for heirs if you die early. This option makes sense when maximizing income is the priority and any legacy goals are being handled entirely through other assets.
Life with period certain
Payments continue for life, but if you die before a guarantee period ends, commonly 10 or 20 years, your named beneficiary keeps receiving payments for whatever remains of that window. The income reduction compared with life only is modest, typically 2% to 5%, which is part of why this is the most popular option among buyers who want some downside protection without giving up much monthly income.
Life with cash refund
If you die before your total payments received equal your original deposit, the insurer sends your beneficiary the difference as a single lump sum. This removes the fear of losing principal outright to an early death, at a typical cost of 3% to 8% less monthly income than life only.
Life with installment refund
The same underlying protection as a cash refund, except the remaining balance is paid to your beneficiary as continued monthly payments rather than one lump sum. It often produces a slightly larger monthly check than the cash refund version, since the carrier keeps use of the money a bit longer before it goes out.
Period certain only
Payments run for a fixed stretch, commonly 10, 15 or 20 years, regardless of whether you are alive to receive all of them. Die during the term and your beneficiary receives the rest. This option is used for specific planning purposes, such as bridging to a future Social Security start date, rather than as a true lifetime income strategy.
Income annuity vs. bond ladder vs. the 4% rule
How does trading a lump sum for guaranteed income actually compare with managing that money yourself? The table below lines up a SPIA against a bond ladder and the traditional 4% withdrawal rule, using clearly hypothetical, round figures rather than any specific product's live pricing:
| Strategy | Guaranteed for life? | Inflation protection? | Principal access? | Hypothetical monthly income on $300,000 |
|---|---|---|---|---|
| SPIA, life only, age 68 | Yes | Optional rider | No | Roughly $2,200 |
| Bond ladder, 20-year, hypothetical 5% yield | No, can run out | TIPS only | Yes | Roughly $1,300 |
| 4% rule, balanced portfolio | No, sequence risk | Yes, via equities | Yes | $1,000 ($12,000 a year) |
| FIA with GLWB, activated at 68 | Yes | Limited, via index | Yes, account value | Roughly $1,750 |
Treat every dollar figure here as illustrative rather than a quote for any real product; get a free quote for numbers that reflect your age, state and deposit. The pattern that holds regardless of the exact figures: a bond ladder or the 4% rule can both run dry if you live long enough or markets go against you. An income annuity structurally cannot. For someone who already has Social Security covering essential bills, keeping the flexibility and growth potential of a portfolio may still make more sense. For someone who needs a guaranteed number to cover non-negotiable expenses, an income annuity is the more dependable tool of the two.
How income annuity payments are taxed
Tax treatment depends entirely on how the annuity was funded.
Non-qualified money
Money funded from a bank account, brokerage account or CD has already been taxed once. The IRS applies an exclusion ratio to split every payment between a tax-free return of your own investment and taxable earnings. As a hypothetical illustration, a 68-year-old funding a $200,000 SPIA with non-qualified savings might find that 65% to 75% of each check comes back tax-free, with only the remaining earnings portion taxed as ordinary income. See our full exclusion ratio guide for the exact formula.
Qualified money
Money rolled over from a traditional IRA, 401(k) or 403(b) has never been taxed. Every dollar of every payment counts as ordinary income when it comes out, because your cost basis in that money is zero; you already received a deduction on the way in. There is no exclusion ratio benefit available on qualified dollars.
What to look for when comparing income annuities
- Carrier financial strength. Your income depends on the insurer's ability to keep paying for decades, so stick with carriers rated A- or better by AM Best. A higher rating points to a lower probability of the company running into trouble.
- Payout rate. With a SPIA or DIA, line up the monthly check each carrier offers per $100,000 deposited, across a handful of companies rather than just one or two. A gap of even 5% to 10% between two otherwise similar offers is common, and on a $300,000 purchase that kind of gap can be worth $100 or more every month, which adds up over a couple of decades.
- Roll-up rate and payout percentage on a GLWB. For an income rider, weigh both numbers together rather than separately. A richer roll-up rate paired with a lower payout percentage at your activation age can end up paying less than a smaller roll-up paired with a stronger payout percentage, depending entirely on how long you plan to defer.
- Surrender charges on an FIA. Surrender periods commonly run 5 to 10 years. Withdrawing more than the contract's free amount during that stretch triggers a charge, so make sure the schedule actually lines up with your own timeline.
- State guaranty association limits. Each state protects policyholders up to its own set limit if a carrier fails, commonly around $250,000. Purchases above that limit are usually better split across two or more top-rated carriers.
Frequently asked questions
What separates a SPIA from a DIA?
Timing is the whole distinction. A SPIA starts paying within about a month of purchase. A DIA pushes that start date out, anywhere from a couple of years to multiple decades. Because the insurer holds a DIA's money longer before the first check goes out, the same deposit typically buys meaningfully more future income than putting it into a SPIA today. Both are locked in once purchased; neither lets you change your mind and reclaim the lump sum.
Can I add inflation protection to an income annuity?
Most carriers offer a cost-of-living rider that raises your payment by roughly 1% to 3% each year. The tradeoff is a lower starting check, often 20% to 35% below a flat payment, and it can take 8 to 12 years before the growing payment catches up to what the flat version would have paid all along. If Social Security, which already adjusts for inflation, is already covering your fixed costs, a flat SPIA may cover the rest without needing the rider at all.
Can I lose money in an income annuity?
On a life-only SPIA or DIA, dying earlier than expected means the insurer keeps whatever principal has not yet been paid out, so in that specific sense, yes. Choosing a period certain or refund payout option instead sends any unpaid balance to your beneficiary. A GLWB rider on a fixed index annuity works differently, since your actual account value stays accessible, subject to surrender charges, so the real risk there is a large early withdrawal rather than an early death. The flip side of a life-only payout is that living a long time makes it pay extremely well.
How is a GLWB income rider different from annuitizing?
Annuitizing is permanent. You hand over the lump sum and receive payments, with no path back to the account value. A GLWB rider on a fixed index annuity instead lets you draw guaranteed lifetime income while still owning the underlying account, which stays accessible subject to surrender charges. The cost of that flexibility is a lower payout per dollar than full annuitization would provide at the same age.
What happens to an income annuity when I die?
It depends entirely on the payout option chosen at purchase. Life only stops immediately with nothing passed to heirs. Period certain sends the remaining scheduled payments to your beneficiary. A cash or installment refund option pays out whatever principal has not yet been returned. Joint life simply continues to a surviving spouse at whatever percentage was selected. Naming a beneficiary at purchase, and revisiting it after any major family change, matters no matter which option you pick.
Are income annuity payments protected if the insurance company fails?
They are not backed by federal deposit insurance the way a bank account is. Every state runs a guaranty association that steps in if a carrier becomes insolvent, typically covering annuity values up to a set limit, commonly around $250,000 per policyholder per company. Sticking with highly rated carriers and staying under your state's limit is what actually manages this risk, and NOLHGA publishes the exact limit where you live.
Written and reviewed by
James Forren Warren
Licensed Retirement Income Strategist · License #20551202
James Forren Warren is a licensed Retirement Income Strategist with Tax Free Wealth Plan. For the past five years he has helped individuals and families turn their savings into retirement income they can count on. He writes and reviews the annuity research on this site and keeps it plain: what a product does, what it costs you, and who it actually fits.
Sources
Educational only, not investment, tax or legal advice. Tax Free Wealth Plan LLC is a licensed insurance agency, not a registered investment adviser or broker-dealer. Annuities are not bank deposits, are not FDIC insured and are not guaranteed by any government agency. Guarantees are backed solely by the claims-paying ability of the issuing insurance company. Features, rates and availability vary by state and change over time; the contract and disclosure documents govern.