Differentiation of primary alveolar type II epithelial cells (AEC II) to AEC type I in culture is a major barrier in the study of the alveolar epithelium in vitro. The establishment of an AEC II cell line derived from induced pluripotent stem cells (iPSC) represents a novel opportunity to study alveolar epithelial cell biology, for instance, in the context of lung injury, fibrosis, and repair. In the present study, we generated long-lasting AEC II from iPSC (LL-iPSC-AEC II). LL-iPSC-AEC II displayed morphological characteristics of AEC II, including growth in a cobblestone monolayer, the presence of lamellar bodies, and microvilli, as shown by electron microscopy. Also, LL-iPSC-AEC II expressed AEC type II proteins, such as cytokeratin, surfactant protein C, and LysoTracker DND 26 (a marker for lamellar bodies). Furthermore, the LL-iPSC-AEC II exhibited functional properties of AEC II by an increase of transepithelial electrical resistance over time, secretion of inflammatory mediators in biologically relevant quantities (IL-6 and IL-8), and efficient in vitro alveolar epithelial wound repair. Consistent with the AEC II phenotype, the cell line showed the ability to uptake and release surfactant protein B, to secrete phospholipids, and to differentiate into AEC type I. In summary, we established a long-lasting, but finite AEC type II cell line derived from iPSC as a novel cellular model to study alveolar epithelial cell biology in lung health and disease.