What is an income annuity and how does it work?

An income annuity can provide you with a stream of guaranteed income, starting when you decide and lasting for life.


If you are in or near retirement and you have some money set aside, an income annuity lets you convert part of your retirement savings into a stream of guaranteed lifetime income payments.1 You can purchase an annuity with a single lump sum of money or through flexible premium payments over time.

In return, you’ll receive a check (or direct deposit) on a monthly, quarterly, semiannual, or annual basis for the rest of your life. Most people choose to start receiving these payments either at or sometime after retirement.

Annuities have a whole host of names, based on benefits and issuing companies, but at their core, they are best understood by their timeline (immediate or deferred) and whether they include market exposure (variable).

An immediate annuity lets you immediately turn a lump sum of money into a guaranteed stream of income. Within the immediate category, there are lifetime annuities (which give you income for the rest of your life) and short-term (also known as period certain or fixed-term) annuities, which give you income for the amount of time called for in the contract.

With a deferred income annuity, you typically make a single lump-sum payment (or a series of payments), and your money grows until you’re ready to start receiving income. Within the deferred category, there are fixed deferred annuities, also known as fixed annuities, which provide growth at a guaranteed interest rate for a specified period of time; and variable deferred annuities, also known as variable annuities, which invest the payment(s) into an underlying portfolio of mutual funds. Variable annuities offer more opportunity for growth, but they are subject to market risks, including the possible loss of principal.

10 things you should know about income annuities

1. Who guarantees my income?

Your income is guaranteed by the company that issues the annuity. So, make sure the company you buy your annuity from is financially sound. This information can be obtained from the leading independent rating agencies: A.M. Best, Fitch, Moody’s, and Standard & Poor’s. New York Life has earned the highest ratings for financial strength currently awarded to U.S. insurance companies by all four leading independent rating agencies.2

2. How can I benefit from an income annuity?

An income annuity can help protect against the risk of outliving your savings. The amount you receive each month is guaranteed, and payments will continue for as long as you live.1

Bear in mind that income annuities are not liquid, and your premium is returned to you only in the form of income payments. Other products provide more liquidity.

3. What other advantages does an income annuity provide?

An income annuity is not subject to stock market performance. Regardless of the ups and downs of the financial markets, the amount of annuity income is locked in and guaranteed.

4. What is the rate of return on an income annuity?

An income annuity is not an investment that provides you with a rate of return over a fixed period of time, like a CD.3 Rather, it's an income product that provides you with fixed monthly income that is guaranteed for life, no matter how the markets perform. The total payout you receive will be based on how long you live. The longer you live, the more total income you’ll receive in your lifetime.

5. How soon can my income payments begin?

Depending on what income annuity you buy, your income payments can begin right away or be put off until a later date.4 If you purchase a single-premium immediate annuity, you’ll receive income within 12 months of purchase—beginning one month after purchase (for monthly payouts), one quarter after purchase (for quarterly payouts), and so on.

If you purchase a deferred income annuity, your payments will begin anytime from two to 40 years in the future. As with a single-premium immediate annuity, you can choose to receive your income payments monthly, quarterly, semiannually, or annually.


6.  Are there age or health restrictions? 

It depends on the type of annuity you purchase and the tax qualification of the funds you use to purchase your annuity. Additional age restrictions may exist, depending on specific benefits selected at the time of purchase. No medical history is required.

7.  What kind of funds can I use to purchase an income annuity?

You can use a variety of sources, including checking or savings accounts, investments, inheritances, or other retirement savings.

You can even combine multiple assets to fund an income annuity.

8.  How much of my money should I use for an income annuity?  

That’s a very individual decision. An income annuity is usually a part of an overall portfolio, and the amount you allocate depends on many factors, including interest rates, your age, and market conditions. 

Bear in mind that there may be restrictions on what you can purchase at the low and high end. New York Life income annuities allow you to purchase an income annuity for as little as $5,000 to $10,000 depending on the annuity, or any amount above that, although any premium payments of $3 million or more require prior New York Life Insurance and Annuity Corporation approval. Together with your financial professional, you can determine the most appropriate amount of money to use to purchase an income annuity, based on your specific situation and needs.

9.  What happens to my money if I pass away unexpectedly?  

Income annuities often offer some form of death benefit. (Most New York Life annuities do.) One of the options you can select is “cash refund.” If you select this option and die before your income payments equal the full amount of your annuity purchase price, your beneficiary will be paid the difference. Additional payout features are also available. Your financial professional will be able to explain all the options and help you decide which will work best for you.

10.  Can I ever withdraw more than my monthly income?  

Money used to purchase an income annuity will be permanently locked into the contract, and it can be returned only in the form of income payments. However, if you are at least age 59½, you may, through optional features for which there is a charge, be able to access future payments, which can be helpful in the event of an emergency.5 When you purchase an annuity, you will discuss with your financial professional which options, available through riders, might be beneficial for you.

Frequently asked income annuity questions

When it comes to creating a lifetime income stream, annuities are often misunderstood. Here are some of the frequently asked questions consumers have:

An annuity is essentially a contract between you and an insurance company. When you purchase a lifetime annuity, you agree to make a lump-sum payment—or series of payments—in exchange for monthly, quarterly, or yearly payments spelled out in the contract, beginning immediately or at some point in the future and lasting the rest of your life.

The amount will depend on your age when you purchase an immediate annuity or annuitize a deferred annuity (the older you are, the higher the payout), your gender (since women tend to live longer, they may get a slightly lower payout), the size of the purchase (a larger purchase will come with a slightly higher payout rate), and the interest rate environment. Because the interest rate environment is constantly changing, contact your New York Life agent to get the most up-to-date information.

It depends on the funds you used to purchase the annuity. If you use pretax money from an IRA or a 401(k) to purchase your annuity, all income payouts you receive will be subject to taxes. If you use after-tax money to purchase your annuity, a portion of the income you receive will be tax-free. If the premium for your annuity is rolled over from a Roth IRA, you will owe no taxes on your annuity payments. It’s important to note that any taxes you owe on your annuity will be taxed at ordinary income-tax rates, not at capital-gains rates. Questions about taxes are best answered by your trusted tax professional.

It depends on your needs, your goals, and the kind of annuity you choose. The more you put in upfront, the higher the interest rate on a deferred annuity; and the longer you wait to receive the income, the higher your likely income payments will be. There are numerous other variables, including age and gender. It’s best to consult with your financial professional to determine which approach to funding your annuity is best for you.

It varies, depending on the product you choose, so this is a topic you will want to discuss with an agent. New York Life’s shortest term for a fixed-deferred annuity is three years, for example. Annuities are usually intended to be part of a long-term approach to generating income, rather than a source of short-term gains.

If you decide to withdraw your money from a deferred annuity during the surrender-charge period, the amount of your withdrawal may be subject to a surrender charge. In addition, earnings from a deferred annuity that you withdraw before age 59½ may be subject to a 10% federal tax penalty. Some annuities offer riders to make early withdrawals less costly, though.

Ultimately, an annuity is for someone looking for long-term growth or lifetime income. You should not buy an annuity if you might need access to the principal before the payout phase.

Mortality credits are an added benefit whenever a lifetime annuitization takes place from a life insurance company. Premiums paid by policy holders who die earlier than expected contribute to gains for the overall pool of participants. This results in greater returns to surviving policy holders and annuitants. By pooling risk, you also pool reward. This is a valuable feature that’s exclusive to annuities from life insurance companies.

It all depends on the specific annuity and the investment funds that have been chosen for it. Do some research online and then talk to an annuity specialist to get more details.

A lifetime annuity will pay out as long as you live, no matter how long that is. A short-term annuity (sometimes called a period certain annuity or a fixed-term annuity) will pay out for the number of years called for in the contract.

They both have a place in retirement planning. And it doesn’t have to be either/or. Ultimately, it depends on your needs and goals.

Many financial professionals recommend that you max out your 401(k) (or IRA) before investing in a deferred annuity. But when you retire, you may want to consider a rollover of a portion of your 401(k) or IRA into the purchase of an immediate annuity. That way, the bulk of your retirement savings will continue to grow in your 401(k) or IRA as you begin to take distributions. But your annuity will give you some guaranteed income in addition to Social Security.

This is not a concern; you will continue to receive income from your lifetime annuity for as long as you live. Insurance companies know that a certain percentage of annuity purchasers will live beyond the point at which the principal and the money earned on it have been returned to the purchaser. They take that into consideration when payout rates are set.

Get more from a company that offers more.

Choice, benefits, and peace of mind are just three reasons why you should consider purchasing an annuity from New York Life.

Our guaranteed lifetime income annuities and lifetime mutual income annuities can provide secure income now.

Our guaranteed future income annuities offer a future start date for your payouts that provide a guaranteed stream of lifetime income when you’re ready to retire.

Our agents are here to answer any questions and help you find the right solution. Plus, with our history of more than 178 years of making prudent decisions and our consistently high for financial strength2 you can rest assured that we will be there when you need us—today, and for the long haul.


Want to learn more about annuities?

A New York Life financial professional can help determine what’s right for you.

1The guarantees of an annuity are based solely on the claims-paying ability of the issuer.

2 New York Life Insurance Company and New York Life Insurance and Annuity Corporation have received the highest financial strength ratings currently awarded to any U.S. life insurer by A.M. Best (A++), Fitch (AAA), Moody’s (Aaa), and Standard & Poor’s (AA+). Source: Individual Third-Party Ratings Reports as of 10/19/2023.

3 CDs are FDIC insured up to $250,000 per deposit. At the end of the maturity term, the full investment amount of the CD, plus interest, becomes available again, whereas with an income annuity each payment includes both interest and return of premium.

4 The New York Life Guaranteed Lifetime Income Annuity and New York Life Guaranteed Future Income Annuity (GFI) are issued by New York Life Insurance and Annuity Corporation (NYLIAC), A Delaware Corporation, a wholly owned subsidiary of New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010. Products are available in jurisdictions where approved. New York Life Mutual Income Annuity and New York Life Future Mutual Income Annuity are issued by New York Life Insurance Company.

5 Proceeds will be fully taxable at the time of receipt. You should consult your own tax adviser prior to exercising a withdrawal feature (such as payment acceleration or cash withdrawal) under an immediate annuity, to confirm tax consequences and penalties, including a retroactive penalty that may apply to policies purchased prior to age 59½. Payment options and features are available only in jurisdictions where approved.

These contracts have no cash-surrender value, and contracts in which a life-only payout option is selected do not provide a death benefit either prior to, or after, the designated income start date. All guarantees are subject to contract terms, exclusions and limitations, and the claims-paying ability of NYLIAC. Additionally, the GFI contract does not permit withdrawals prior to the income start date, and it guarantees income payments at least as long as the annuitant is living, provided the annuitant is alive on the designated income start date.

For most jurisdictions, the policy form number for the New York Life Guaranteed Lifetime Income Annuity is ICC11-P102; it may be 211-P102, and state variations may apply.

For most jurisdictions, the policy form number for the New York Life Lifetime Mutual income Annuity is 214-P200 and state variations may apply

For most jurisdictions, the policy form number for the New York Life Guaranteed Future Income Annuity is ICC11-P100; it may be 211-P100, and state variations may apply.

For most jurisdictions, the policy form number for the New York Life Future Mutual Income Annuity is 215-P200 and State variations may apply.