By Marc Gilman
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Key Takeaways
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An annuity is an insurance contract. The National Association of Insurance Commissioners (NAIC) describes it as “an insurance contract sold by life insurance companies” that can provide income for life.
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Life insurance and annuities carry opposite risks. Life insurance costs the company more when people die sooner than expected. Annuities cost more when people live longer than expected.
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Holding both can partly offset the risk. Researchers call this a “natural hedge.” It is not perfect, and it is only one of several tools insurers use.
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The guarantee is only as strong as the company. State regulation, reserve requirements and state guaranty associations are part of the safety net, but they have limits.
Why Are Life Insurance Companies Allowed to Issue Annuities?
Because an annuity is an insurance product. Life insurers have always taken on risk tied to how long people live, and an annuity is the same business seen from the other direction. Instead of paying a death benefit when someone dies, the company pays income while someone lives.
According to the NAIC, life insurance and annuities are regulated by state insurance commissioners. The NAIC develops model laws that states can adopt, including a model regulation on suitability in annuity transactions (Model #275) and one on annuity disclosure (Model #245). Insurers must also hold reserves for the promises they make, and the NAIC’s Life Actuarial Task Force maintains the technical valuation requirements for both non-variable and variable annuities. Variable annuities, which carry investment risk, are also treated as securities and are subject to federal securities rules.
The NAIC also notes that annuity sales volumes eventually outpaced those of traditional life insurance. Today annuities are a core part of most life insurers’ business.
What Is Longevity Risk, and Why Does It Matter to the Insurer?
When a company promises income for life, it takes on longevity risk: the chance that its annuity customers live longer than the company assumed. Pricing is based on mortality tables and assumptions about future investment returns. If people live longer than expected, the company pays more income for more years than it planned.
For you, the risk is the reverse. Running out of money is the retirement risk annuities are designed to address, and the insurer is the one that carries it. That is why the insurer’s financial strength matters.
How Does a Life Insurance Book Offset Annuity Risk?
Think of two opposite bets on the same question: how long will people live? As AnnuityJournal puts it, an annuity pays you income during your lifetime, while life insurance pays your beneficiaries after you die. Annuities address the risk of outliving your savings, and life insurance addresses the financial harm of dying too soon.
If mortality improves and people live longer than assumed, annuity payouts last longer, but life insurance death benefits are paid later or less often than expected. If people die sooner than expected, the reverse happens. Academic research describes this as a natural hedge: “when mortality changes, the values of life insurance and annuity liabilities typically move in opposite directions,” according to a 2024 paper by Gabric and Zhou, so one book can reduce the effect of surprises on the other.
In one often-cited modeling study, Gatzert and Wesker (2012) found that a mix of roughly 15% to 20% term life insurance and 80% to 85% annuities could significantly reduce exposure to shifts in mortality, depending on the scenario and risk measure. That is a research model, not a description of how any particular insurer is built.
Where Does the Natural Hedge Fall Short?
The offset helps, but researchers are clear that it is imperfect:
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The two groups are different people. Life insurance is often bought by younger people and annuities by retirees, and improvements in life expectancy are not the same at every age. Gatzert and Wesker note that gains at older ages don’t help life insurers whose policies end before then.
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The product mix matters. Gabric and Zhou found that when issue ages or policy terms differ from the annuity portfolio, the hedge becomes less effective and more residual risk remains.
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Models can be wrong. If the mortality assumptions behind the hedge differ from what actually happens, results can be more volatile.
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It is not the only tool. Insurers also manage longevity risk by pooling a large number of annuitants, investing assets to match the timing of future payments, and in some cases transferring risk through reinsurance.
So a life insurance book can help balance annuity risk, but it does not eliminate it, and one company’s mix may look very different from another’s.
What Protects Me If an Insurer Runs Into Trouble?
Several layers apply: state regulation and reserve requirements, the insurer’s own financial strength, and your state’s life and health insurance guaranty association. According to the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), all member guaranty associations offer resident policyholders $250,000 or more in annuity benefits, and New Hampshire and Massachusetts are listed at that level for annuities. Limits vary by state and policy type, and guaranty protection is a backstop, not a substitute for choosing a strong issuer. If you hold a large contract, ask how it fits within your state’s limit.
Where Does Insurance Planning Fit In?
Understanding how insurers manage longevity risk helps you ask better questions about any annuity: How strong is the company? How are the guarantees funded? What are the surrender charges and fees? How much of your savings should be committed to guaranteed income versus kept accessible? We can help you compare companies and products and see how a guarantee would fit alongside your other income sources.
What To Do Next
If you’d like to talk through how annuities work, or review one you already own, we’re happy to walk through it with you.
Questions? Call (800) 927-9326 or email
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Sources: NAIC, “Annuities” (content.naic.org/insurance-topics/annuities); Gabric and Zhou (2024), “A Natural Hedging Framework for Longevity Risk with Graphical Risk Assessment,” arXiv:2510.18721; Gatzert and Wesker (2012), “The Impact of Natural Hedging on a Life Insurer’s Risk Situation,” Friedrich-Alexander University working paper; NOLHGA, “The Safety Net” (2024-2025); AnnuityJournal.org, “Annuity vs. Life Insurance” (updated July 20, 2026).
This article is for general educational purposes and is not a recommendation to purchase any specific insurance or annuity product. Annuity guarantees are backed by the claims-paying ability of the issuing insurance company, and annuities involve costs, surrender periods and limitations that should be reviewed carefully. Guaranty association coverage has limits and varies by state. This is not tax, investment or legal advice, and this is not an offer of coverage. We do not offer every plan or product available in your area. Consult a licensed insurance professional and a tax or financial advisor regarding your specific situation.
