Annuity Payout Options: Immediate vs. Deferred

Annuity Payout Options: Immediate vs. Deferred

Annuities are versatile tools for income planning. These insurance contracts enable you to design an income that fits your needs with a variety of annuity payout options. For example, you can set up a stream of payments for the rest of your life or make arrangements to provide income to survivors after your death.

Whether you want income now or later, it's helpful to understand the range of options available.

Immediate vs. Deferred Income Annuities

One of the first choices to consider is when you want your income payouts to begin.

Immediate Annuities

An immediate annuity typically begins paying out within one year after you buy the annuity. That might be useful when you want to draw income from your assets soon.

For example, if you're retiring today, but waiting several years to take Social Security benefits, an annuity can provide income to replace your earnings. Those payments are guaranteed to last for a specific length of time (whether that's for several years or the rest of your life), so you can count on a predictable income stream until Social Security kicks in.

Deferred Annuities

With a deferred annuity, you don't need to take income within the first year. In fact, you might not ever draw a systematic income stream from a deferred annuity.

These contracts allow you to invest funds and leave them in the annuity — ideally growing over time. Then, if you decide to convert the assets in your annuity into an income stream, you have the option to do so.

Insurance companies typically invest money in a deferred annuity, and they might pay interest on your balance. Some products include growth guarantees or exposure to financial markets, and if all goes well, you might secure a higher payout with those features. Plus, funds can grow tax-deferred inside of an annuity, which could be beneficial when you have money from taxable sources.

Choosing Between an Immediate or Deferred Annuity

Allowing funds to grow in a deferred annuity might provide a bigger base of assets to draw income from. That's helpful when you don't need income right away and you want to maximize your income later. However, some annuities, like variable annuities, can potentially lose money over time. If your contract loses money, you might end up with less income (unless you're protected by insurance company guarantees).

An immediate annuity can provide guaranteed payments when you need income. You don't need to manage the funds while you draw income, and by converting an annuity into an income stream, you might get the highest guaranteed payments available. But it's important to consider what happens if you die shortly after buying an immediate annuity. Unless you use features that protect your loved ones, the annuity might not pay back all of your money.

Lifetime Income vs. Period Certain Options

Lifetime Income Guarantees

Annuities can pay out for your entire life — and possibly the life of a joint annuitant. So, if you're concerned about running out of money in retirement, lifetime income guarantees might appeal to you. Those guarantees allow an annuity to continue paying income, even if you live an exceptionally long life. In some cases, an annuity can pay out substantially more than you invest.

You can also choose a joint lifetime payout option that covers two people (such as a spouse). With that strategy, the annuity provides income for both lifetimes, and payments last for whomever lives the longest — you or your spouse.

When choosing annuity payout options, it's important to compare the features and payment amounts. For example, a single lifetime payout typically provides the biggest payments. But when you add a joint annuitant, it's likely that the payments will last longer, so your monthly payments are typically smaller. However, you can be confident that a surviving spouse will continue to get income regardless of who dies first.

Period Certain

A period certain option ensures that an annuity pays out for a specific number of years (known as the period certain).

For example, you might choose a lifetime payout with a 20-year period certain, which provides income for your lifetime or 20 years — whichever is longer.

With a standard lifetime income guarantee, there's always the risk that you'll die shortly after you begin income. If that happens, the payments typically stop unless you have a joint annuitant or a period certain. But a period certain improves the chances of recouping your investment. That's because you can be confident that you (or your beneficiaries) will get payments for at least 20 years.

Which Is Best?

Evaluate your household finances to decide which is best.

If you don't have a spouse or dependents who rely on income from your annuity, it could make sense to go with a single lifetime payout option. That approach offers the highest monthly or annual income, and payments continue no matter how long you live. But it's crucial to think about the impact on loved ones if you die earlier than you expect.

If your income supports others, consider using a period certain or a joint lifetime payout. When used well, those strategies can ensure that payments continue for as long as necessary. The trade-off is that you should expect smaller payments as you reduce risk for your loved ones. However, the difference could be minimal, and it's worth exploring all of the options before you decide.

What to Consider When Choosing Options

Discuss your needs with a financial professional to learn about your options, and be sure to include the factors below in your decision.

Need for income: When you need income from your assets, an annuity designed for lifetime income or a period certain might make sense. Those offerings can provide systematic payments that replace earnings from a job. But if you don't need regular income, a deferred annuity might provide growth for a bigger income down the road.

Health and longevity: A lifetime annuity can pay out income for as long as you live, even if you live an extraordinarily long life. That's valuable when you have good health. But if you have health conditions that could lead to an early death, it's wise to explore options for protecting any dependents.

Survivors: If you're single with no dependents, you can pick the option with the most attractive income. But things are more complicated when a surviving spouse or somebody else needs financial support.

Company strength: Guarantees like lifetime income are only as good as the insurance company behind them. If an insurer goes bankrupt, you may lose benefits, so it's critical to choose insurers with high ratings.

The Bottom Line

Most insurers offer several annuity payout options, enabling you to design an income plan that satisfies your needs.

To pick the right plan, review your budget and decide when you need income. Then, consider who relies on your income. If your death will leave anybody in financial hardship, evaluate if a joint payout or period certain makes sense. With a broad range of choices available, you and your insurance company can likely build a solution that's right for you and your loved ones.

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