Written By : Elaine Silvestrini
This page features 15 Cited Research Articles

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Annuity purchasers have options regarding how the annuity payouts are structured. These include when payments begin, how long they last and whether they will go to a beneficiary when the annuitant dies. Two of the most common annuity payouts are period certain, which guarantees income for a specific time period, and guaranteed lifetime payments.

When it comes to retirement savings, a lot of investors want to have it both ways. A Gallup poll found 85 percent of investors want to have guaranteed income to supplement Social Security, while half also want the freedom to spend their retirement savings as they choose. Just 27 percent were willing to give up access to some of their savings to provide the guaranteed stream of income.

Unfortunately, retirees are frequently required to choose between unfettered access to savings and the security of a guaranteed income flow.

This is the case with annuities, which provide income while depriving investors of access to the money that funds those income payments.

Annuity Payout Options
Source: Gallup.com

When setting up an annuity, investors do have a lot of choices on how that income will be determined, when it will begin and how long it will last. Each choice comes with different tradeoffs and calculations that should be understood.

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When You Start Receiving Payments

One major factor to consider when purchasing an annuity contract is when you want to start receiving your payments. Are you hoping to start receiving payments right away, or are you planning for your future retirement?

Annuities by Payment Types Payments begin Potential buyers
Immediate Annuity (Income Annuity) Within a year of purchase People expecting to retire soon may use it for supplementary income stream
Deferred Annuity Retirement or other time in future Buyers who want to grow investments tax-free, resulting in larger payments, at retirement

Immediate Annuity (Income Annuity)

With an immediate annuity, also known as an income annuity, you begin receiving payments within a year of purchasing the annuity with a lump sum. The monthly payments are guaranteed for life. If you’re about to retire, it can be a good way to use a part of your retirement savings to create an income stream.

Deferred Annuity

Deferred annuities, also known as longevity annuities, don’t pay the annuitant until a time later than they were purchased. Usually, the payments are deferred until retirement. In the interim, the annuity grows as interest accumulates tax-free. The longer the time between purchase and the start of payments, the more the annuity will grow and the larger the payments will be when they start.

How Long Will Payments Last?

The next major consideration is whether you want to risk losing a significant portion of your investment to the annuity company if you die before receiving enough payments to justify the annuity purchase. Here, too, there are several options.

Annuity payout options include:
  1. Single Life/Life Only
    Lifetime of payments but no survivor benefit.
  2. Life Annuity with Period Certain (Fixed Period/Guaranteed Term)
    Minimum period of payments - even after death of buyer - with remaining payments to beneficiary.
  3. Joint and Survivor Annuity
    Payments last life of both spouses.
  4. Lump-Sum Payment
    Entire annuity paid at once with heavy tax burden.
  5. Systematic Annuity Withdrawal
    Amount and frequency of payments customizable.
  6. Early Withdrawal
    Withdraw before 59 1/2, pay 10 percent in taxes.

Single Life/Life Only

Also known as a straight-life annuity, this choice allows you to receive payments your entire life. Unlike some other options that allow for beneficiaries or spouses, this annuity is limited to the lifetime of the annuitant with no survivor benefit. The risk is you will die before getting all or most of your money back. You can limit the possible loss here by choosing a life annuity with period certain.

Life Annuity with Period Certain (Fixed Period/Guaranteed Term)

Period certain annuities are the same as a straight-life annuity, but it includes a minimum period the payments will last – say 10 or 20 years – even if the annuitant dies. If the annuity holder dies before the end of the period, the payments for the rest of that time will go a beneficiary or the annuitant’s estate. Adding the period certain will cost you, lowering the amount of your monthly payments.

Joint and Survivor Annuity

Also known as a joint-life annuity, a joint and survivor annuity guarantees payments will last the lives of both the annuitant and another person, typically a spouse. This choice reduces the amount of each payment you receive with a life annuity or a life annuity with period certain. You can also elect to include a period certain with a beneficiary receiving payments if both you and your spouse die before the end of the period.

Lump-Sum Payment

This option allows the annuitant to receive the entire worth of the annuity at one time. This can increase the tax burden substantially by requiring taxes all be paid in that year.

Systematic Annuity Withdrawal

In this method, you choose the amount of the payments and how many payments you want to receive. This option does not include a guarantee it will last your entire life. It is entirely dependent on the amount of money in your annuity account.

Early Withdrawal

If you elect to withdraw money from your annuity before you reach the age of 59 ½, you will have to pay a penalty of 10 percent to the government, in addition to whatever taxes you owe on the money. If that withdrawal is within five to seven years of purchasing the annuity, you may also owe the annuity provider a surrender charge of as much as 20 percent, depending on how much time has passed since the purchase.

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Death Benefit

Your annuity contract may include a provision for a death benefit for a beneficiary you designate. Usually, the payout for the beneficiary will be the contract value or the amount of the premiums that have been paid.

If you are the non-spouse beneficiary of an annuitant who has died, you have a few different options to receive payment from a nonqualified, deferred annuity.

Five Year Rule

One involves invoking a requirement that all the money in the annuity must be distributed within five years of the annuitant’s death.

Beneficiary Life Expectancy

The beneficiary may also choose to have the money distributed according to his or her life expectancy. The life expectancy is used to calculate the minimum amount the beneficiary must withdraw each year.

Survivor Annuitization

And finally, the beneficiary may choose to annuitize the funds. This means the annuity becomes a guaranteed stream of income for the beneficiary. This can use the single-life or term-certain options described above.

Do Annuities Have Declared Dividends?

Annuities are different than stocks and do not have the same structure. With stocks, you have public corporations with boards of directors that decide to declare a dividend for payments to shareholders from company profits. Annuity payments are either fixed ahead of time or tied to the performance of an index or stock portfolio.

Last Modified: March 25, 2020

15 Cited Research Articles

  1. Maranjian, S. (2018, April 1). Here’s a Retirement Strategy That Can Promise You Won’t Run Out of Money. Retrieved from https://www.fool.com/retirement/2018/04/01/heres-a-retirement-strategy-that-can-promise-you-w.aspx
  2. Updegrave, W. (2017, September 20) Is an annuity a good deal? Retrieved from https://money.cnn.com/2017/09/20/retirement/immediate-annuity/index.html
  3. Updegrave, W. (2018, May 2). One way to get retirement income for the rest of your life. Retrieved from https://money.cnn.com/2018/05/02/retirement/immediate-annuities-explainer/index.html
  4. Duncan, T.H. (2015, April 23) Helping an Annuity Beneficiary Understand Distribution Options. Retrieved from https://www.wealthmanagement.com/annuities/helping-annuity-beneficiary-understand-distribution-options
  5. Updegrave, W. (2017, April 26) The best way to get guaranteed income in retirement. Retrieved from https://money.cnn.com/2017/04/26/retirement/annuities-retirement/index.html
  6. Lankford, K. (2018, July 11). A Tax-Friendly Way to Get Income for Life. Retrieved from https://www.kiplinger.com/article/retirement/T003-C001-S001-a-tax-friendly-way-to-get-income-for-life.html
  7. Saad, L. (2018, January 5). Investors Want Freedom With Retirement Savings. Retrieved from https://news.gallup.com/poll/225023/investors-no-strings-attached-retirement-income-stream.aspx
  8. Lankford, K. (2018, July 11). A Tax-Friendly Way to Get Income for Life. Retrieved from https://www.kiplinger.com/article/retirement/T003-C001-S001-a-tax-friendly-way-to-get-income-for-life.html
  9. Financial Industry Regulatory Authority. (n.d.). Selecting Retirement Payout Methods. Retrieved from http://www.finra.org/investors/selecting-retirement-payout-methods
  10. Office of the Insurance Commissioner Washington State. (n.d.). Annuity payout options. Retrieved from https://www.insurance.wa.gov/annuity-payout-options
  11. CNN Money. (n.d.). Ultimate Guide to Retirement. What payout options do I have? Retrieved from https://money.cnn.com/retirement/guide/annuities_basics.moneymag/index8.htm
  12. Murray, S. (2018, January 29). Selecting the payout on your annuity. Retrieved from https://www.investopedia.com/articles/retirement/05/071105.asp
  13. Maverick, J.B. (n.d.) who actually declares a dividend? Retrieved from https://www.investopedia.com/ask/answers/090415/who-actually-declares-dividend.asp
  14. Trafvillian, A. (2018, January 10). Better for Retirement: Dividend Stocks or Annuities? Retrieved from https://www.investopedia.com/articles/financial-advisors/121615/better-retirement-dividend-stocks-or-annuities.asp
  15. CNN Money. (n.d.). Ultimate Guide to Retirement. What if I decide to withdraw the money? Retrieved from https://money.cnn.com/retirement/guide/annuities_basics.moneymag/index9.htm