An annuity, which is a contract between you and an insurance company that allows you to convert your savings into guaranteed future income, typically offers several different annuity payout options depending on your needs. You can arrange for payments in a lump sum, over a fixed period or for the rest of your life. In some cases, you may be able to pick a combination of these choices.
Here we will discuss the basic payout types and how they function to help you select an arrangement that fits into your financial and retirement plans.
Common Annuity Payout Options
First, it may be helpful to know two things that can affect your payment options and amounts overall:
- The longer you will be receiving payments, the smaller the payment amount will likely be.
- Annuity payment streams can be either immediate or deferred.
In the case of deferred annuities, also called longevity annuities, payments are typically scheduled to begin years after the purchase of the annuity contract. This aspect of deferred annuities allows time for the annuity amount to grow and can increase future payment amounts. On the other hand, an immediate annuity, often referred to as a single premium immediate annuity (SPIA), usually begins payouts within a year of the contract purchase.
If you choose to set up a lump sum payout, you can expect to receive your annuity income in one large payment. This payment option can seem pretty simple and straightforward, but there are some important considerations. For instance, you will likely receive less money than you would have received with a longer payment schedule, such as a fixed period. You may also have to pay income taxes on the growth portion of your annuity for the tax year in which you receive the payment.
Life-only is a common payout choice that provides income for as long as the annuity holder is alive. Also referred to as single-life, the life-only setup typically offers no survivor benefits, and payments are based on your life expectancy as calculated by actuaries. This means that the longer you are expected to live, the smaller your payments might be, and you could forgo part of the annuity amount if you die sooner than expected. However, if you outlive your life expectancy calculations, you can receive more than the accumulated value of the annuity.
Joint and Survivor
A joint and survivor annuity is similar to a life-only annuity in that the guaranteed payment amounts are based on life expectancy. However, the contract takes into account the life expectancy of both the annuity holder and a designated survivor, typically a spouse. In most cases, these payments will be smaller than life-only annuity payments.
Fixed Period/Period Certain
Fixed period annuities, also referred to as period certain annuities, deliver an income stream over a set period time that you choose, such as 10 or 20 years. Depending on the length of payment and other factors, a period certain option may offer higher payments than a life-only annuity. If you die before the end of the payout schedule, the remaining payments can go to a beneficiary.
A period certain option may be added to other annuity types, such as a life-only annuity, to arrange for a beneficiary to receive income for a set time after your death. Keep in mind that doing so can lower monthly payments. However, you may want to prepare financially for the possibility that you could outlive the payment span.
Choosing the Right Payout Option for You
While these are the most common annuity payout options, not all of them will be available on every contract, and some providers may even offer different choices. Before making a choice, make sure you weigh your financial needs and goals carefully. With the help of a financial advisor or a trusted friend or family member, take some time to consider the following:
- How much income you will need from the annuity to meet your financial and retirement goals.
- How long you will want to receive payments based on other assets in your investment portfolio.
- Whether or not you plan to leave funds behind for family members or estate plans.
- How your annuity payouts may affect your tax obligations.