If I Turn On My Income, Could I Run Out of Money?

Most people who buy an annuity are told, at some point during the sales process, that the income is "for life." That phrase gets used a lot. The trouble is that "for life" means different things in different contracts. In some annuities, the payments genuinely continue until you die, no matter how long that takes. In others, the payments continue only until your account value runs out.

Both of those are legal. Both get sold. And the difference between them can be the difference between a comfortable retirement and a scary phone call in your 80s.

This guide walks through what "income for life" actually means, the three main ways annuities pay you, and exactly how to tell which one your contract uses.

Where the confusion comes from

The phrase "income for life" gets used two different ways in the annuity world, and they are not the same thing.

The first way means the carrier will keep sending you checks for as long as you are alive, no matter what. Your account could go to zero, and the checks keep coming. That is a real lifetime guarantee.

The second way means the annuity will keep paying "as long as there is money in the account." That is often described as income for life because most people assume the money will last. But it is not a lifetime guarantee. It is a schedule of withdrawals that ends when the balance hits zero.

Both get pitched. Both show up in contracts. And most owners cannot tell you which one they have without pulling out the paperwork.

The three ways an annuity can pay you income

There are three main structures used to turn an annuity into income. Each one handles the "what if the money runs out" question differently.

1. Annuitization (SPIA or any annuity you annuitize)

When you annuitize, you hand the carrier your account value in exchange for a stream of payments. You cannot get the money back. The carrier promises to pay you a set amount every month, and if you chose a single life option, those payments continue for as long as you are alive. If you chose joint life, they continue as long as either you or your spouse is alive.

There is no account value left. There is nothing to run out. The carrier is on the hook to keep paying you until you die, even if you live to 110.

Single Premium Immediate Annuities (SPIAs) work this way by design. Any other annuity can also be annuitized if you choose that option at the point of income.

2. Guaranteed lifetime withdrawal benefit (GLWB) rider

This is the most common lifetime income feature on fixed index and variable annuities sold in the last 15 years. When you turn on income, the carrier calculates a set annual withdrawal amount based on your age and your income base. You get that amount every year for the rest of your life.

Here is the key part: the carrier keeps paying you that amount even if your account value drops to zero. The account might be drained by your withdrawals, by fees, or by weak market returns. Once you turn on the GLWB, the carrier is on the hook for that annual payment for the rest of your life regardless.

You still own the account value on the side. If there is money left, you can pass it to heirs. If it is gone, the income continues. You get both.

3. Interest-only or scheduled withdrawals

Some people set up their annuity to pay them the interest each year, or to take a set dollar amount every month, without turning on any lifetime income guarantee. This is not a lifetime income structure. It is a withdrawal schedule.

If the market cooperates and your withdrawals stay small, the money might last a long time. If it does not, the account can run out. When it does, the payments stop. There is no carrier promise to keep sending checks.

Income structures side by side

Here is how the three structures compare on the questions that matter most.

What actually happens when a GLWB account hits zero

This is the part that trips people up, so it is worth spelling out.

Say you have a $250,000 annuity with a GLWB rider that pays 5.5% for life starting at age 65. That is $13,750 a year, every year, for the rest of your life.

You take the $13,750 every year. Some years the market helps, some years it does not. Fees come out of the account too. After 18 or 20 years, the account value shows $0 on your statement.

Here is what happens next: the carrier keeps sending you $13,750 a year. Every year. Until you die. Your account balance is empty. Your income is not.

That is the whole reason people pay a rider fee to have a GLWB attached. The carrier is taking the risk that you live long enough, or that markets are weak enough, to drain the account. If that happens, the carrier eats it. You keep getting paid.

Single life vs joint life: it matters more than you think

Every lifetime income option, whether it is an annuitization or a GLWB, comes in two flavors: single life and joint life.

A single life option pays you for as long as you are alive. When you die, the income stops. If you were the surviving spouse counting on that income, it is gone.

A joint life option pays for as long as either you or your spouse is alive. The monthly amount is a little lower, usually 0.5% to 1% off the single life rate, because the carrier expects to pay for longer. But when you die, your spouse keeps getting the check.

Many older contracts were sold as single life without a joint life conversation. If you have a spouse who depends on this income, that is worth checking before you turn on payments. Once income starts on a single life basis, it usually cannot be switched.

5 warning signs your income is NOT actually guaranteed for life

You do not need a full contract review to spot the red flags. Here are five patterns that tell you the "income for life" you were promised may not be a real lifetime guarantee.

1. Your statement does not show a separate income base

If your annual statement only shows one number (the account value), and there is no separate line for an income base or benefit base, you probably do not have a GLWB rider attached. Without a rider, "income" often means scheduled withdrawals that will end when the account is empty.

2. Your contract mentions withdrawals but not "lifetime"

Read the section of your contract that describes income options. If it uses phrases like "systematic withdrawal" or "period certain" without the word "lifetime" or "for life," what you have is a withdrawal plan, not a guarantee.

3. Nobody explained a rider fee at the time of sale

Lifetime income riders cost money. A typical GLWB rider fee runs 0.95% to 1.65% a year. If nobody ever told you about a rider fee, and your statement does not show one being deducted, you likely do not have a lifetime rider.

4. The word "annuitize" is in your future decision, not your past

If you have to make a decision to annuitize at some future date to get lifetime income, then right now your account is set up as a growth vehicle, not a lifetime income vehicle. The lifetime promise only kicks in when you make that election.

5. Your paperwork says "period certain" or "10 year certain"

These are fixed payout periods. A 10 year certain option pays for 10 years, then stops. A 20 year certain option pays for 20 years, then stops. Neither is a lifetime guarantee, even though they sometimes get described as "income streams."

How to verify your income guarantee in one phone call

You do not have to guess. Every carrier can tell you exactly what you have in a five minute call. Here is what to ask.

Call your carrier's policyholder services line

The number is on your annual statement. Ask for the annuity department, not the general customer service line. Have your contract number ready.

Ask these four questions

1. "Does my contract have a guaranteed lifetime withdrawal benefit rider attached? Yes or no?"
2. "If I turn on income today, what is the guaranteed annual amount, and does it continue for life even if my account value hits zero?"
3. "Is the income single life or joint life? Can I change that before I turn it on?"
4. "What is the maximum I can withdraw each year without cancelling the lifetime guarantee?"

Request a written illustration

Ask the carrier to email or mail you a written illustration showing your guaranteed lifetime income based on your current numbers. This puts the promise in writing. Save it with your contract.

What if I already turned on the wrong kind of income?

If you already annuitized, the decision is permanent. You cannot unwind it. But if you turned on a GLWB and you are unhappy with the payment amount, you sometimes still have options. Depending on the contract, you can stop the withdrawals, move the remaining account value elsewhere through a 1035 exchange, and turn on a new lifetime income stream from a different carrier.

Whether that math works out depends on the surrender charges left on your current contract, the payment rates available today, and your age. It is the kind of question a written side by side audit can answer in about two weeks.

The bottom line

"Income for life" is a phrase that gets used loosely. In some annuities it means exactly what it says: the carrier pays you until you die, no matter what. In others, it means "until the account runs out." Both are legal, and both are common.

You should know which one you have before you turn on your first payment. Reading your contract is one way. Calling your carrier is another. Either way, do not guess.