Skip to Main Content

Start Of Main Content

How do annuities work?

An annuity could be a valuable addition to your retirement plan. Here's how they work.

Couple reviews annuity information.

A paycheck for life

Sometimes referred to as a retirement annuity, a life annuity or annuity insurance, an annuity is an insurance contract you purchase that guarantees you'll receive a specified amount of money every month for the rest of your life, no matter how long you live.

One way to think about annuities is that they kind of provide the opposite type of protection as life insurance. Most people buy life insurance in case they die too soon, while annuities provide a safety net for living a long life, which many people find very comforting. As we get older, nobody wants to stress at each passing birthday - happy to be alive, but worried about running out of money. An annuity can help ease those concerns.


Annuities 101

At its core, an annuity is a savings option for retirement. It provides a way for you to save money on a tax-deferred basis and receive a steady income in retirement that you can't outlive. It's a contract between the owner of the annuity and the company issuing it. You buy the annuity and the company pays you interest on the money. At a certain age you start taking the money out and you could receive payments for as long as you live.

Types of annuities

State Farm® annuities are purchased with one single premium, and there are two main types:

  • Immediate Annuities generate income immediately after purchase.
  • Deferred Annuities allow your investment to grow tax-deferred until you decide to start receiving income payments at some point in the future.

Annuities have two phases.

  • Annuitization phase: The annuitization phase is when you start receiving payments, typically at retirement.

How do annuities pay out?



Life income annuities with period certain options are popular, too, where if you pass away before the period certain, your beneficiary is guaranteed to receive payments for the number of years you chose. If you live past that date, you'll still continue to receive payments for the rest of your life. An example might be a 10-year option where you'll get payments for life no matter what. But if you pass away before 10 years are up, your beneficiary will receive payments for the remaining time.

What is a retirement annuity?


What is a life annuity?


What is annuity insurance?

Annuity insurance is another way annuities are described. And that's really the basis of what an annuity is — a very simple insurance contract whose main purpose is to protect you from outliving your income.

Why buy an annuity?

You think you might like to travel extensively in retirement? How about purchase a new car every few years? Use your annuity payout instead of taking the money from your stock market account.

Annuities are also great for people who are not very risk tolerant and want a safe place for their money to grown with some form of guarantee that you won’t outlive your money in retirement.

Get started today

If you're interested in learning more about an annuity and how it could fit into your future goals, talk with your local State Farm agent.





Bloomington, IL

Each insurer is financially responsible for its own products.


Also Important

Should I Consider an Annuity?

Should I Consider an Annuity?


What is a Rollover?

What is a Rollover?


Related Articles

Pension Questions: Should I Take a Lump Sum Offer?

Pension Questions: Should I Take a Lump Sum Offer?


5 Ways to Help Your Retirement Savings Go Further

5 Ways to Help Your Retirement Savings Go Further


Planning for an Easier Retirement Without a Mortgage

Planning for an Easier Retirement Without a Mortgage
