Let’s start with a list of some terms that annuity buyers should know.
The life insurance carrier that issues the contract and collects premium payments, then pays them out to the payee as specified in the contract.
The investor who purchases the contract and pays the premiums into it. (There can be joint owners, and the contract can also be owned by a trust.)
The person whose life expectancy is used to calculate the payout from the contract at annuitization. (There can be joint annuitants.)
The person who receives the annuity payments at annuitization. (There can be joint payees, and the owner, annuitant and payee are often the same person or persons.)
Annuity payout period
The period of time where the payee receives a payout from the contract at annuitization.
Phases of an annuity
Prior to evaluating your payout options, it's important to understand the phases of an annuity. The accumulation phase is the period in which you contribute money to the annuity through either a series of payments or a lump sum. During this period, the annuity has an opportunity to build cash value.
After the accumulation phase comes the annuitization phase. In this phase, the life insurance company distributes payments from the annuity. The income from an annuity can be paid out in a lump sum or through a series of payments. These payments can provide a stream of income for retirement.
Common annuity payout options
Now that you understand a little about how an annuity works, we've listed some of the most common payout options.
Life-onlyLife-only provides you with regular, guaranteed income payments from your annuity for life. By choosing this option, you essentially eliminate the risk that this income source will run out before you die.
Joint and survivorJoint and survivor life ensures the retirement income provided by your annuity will continue for your spouse when you die. However, payments are calculated and based on the life expectancy of both you and your spouse, making payments for the joint-life option lower than with the life-only option.
Fixed periodFixed period (or period certain) is an option that allows you to select a specific time period for which your annuity payments will last. Because you won't be receiving payments for life (as with the life option), payments are higher, but you run the risk that your annuity payments will run out before you die. For example, if you're age 65 and select 15-year period certain payout, your annuity contract will guarantee payments until you reach age 80. So if you live longer than 80 and don't have any other source of retirement income, you might find this option too risky.
Life with period certainLife with period certain (or guaranteed term) provides you with guaranteed income for life (just like the life option), but also allows you to select a specific time period for which your annuity must pay your designated contingent payee even if you die before that guaranteed period ends. While this option provides you with income for life, payments are generally smaller than they would be under the life-only payout.
Fixed amountFixed amount (or systematic withdrawal schedule) allows you to select the amount of the payment you want to receive each month. The payments continue until the total accumulated value has been paid out. The duration of payments will depend both on the amount chosen and the annuity's accumulated value at the time of annuitization. For this reason, the insurance company cannot guarantee that you will not outlive your income payments.
Lump-sum payment allows you to receive your annuity payout in one lump sum. However, in the year you take the lump sum you'll have to pay income taxes on the entire investment-gain portion of your annuity. For some qualified accounts the entire sum may be taxable. Be sure to consult a qualified tax professional or financial professional before taking a lump sum from an annuity.
Selecting the best annuitization payout for your annuity can be confusing. Begin by deciding on the amount you will need each month to live on or to supplement your retirement and how long you think you'll need to receive payments; then meet with a qualified insurance agent or financial planner to determine the option that's best for you.
Selecting the payout in your annuity
Selecting the best annuitization payout for your annuity can be confusing. Here are some considerations to take into account as you decide which payout option may be right for you.
How much — Begin by deciding on the amount of money you will need each month to live on or to supplement your retirement.
How long — Consider how long you think you’ll need to receive payments. If you will be using payments for a significant portion of your income, you may consider a payout option that guarantees payments will be made until your death
Legacy considerations — For an additional cost, many annuities offer an enhanced death benefit during the accumulation phase.
Annuities are intended as vehicles for long-term retirement planning, which is why withdrawals reduce an annuity’s remaining death benefit, contract value, cash surrender value and future earnings. Annuities also may be subject to income tax and, if taken prior to age 59 ½, an additional 10% IRS tax penalty may apply. Because Protective and its representatives do not offer investment, legal or tax advice, it is important that you talk with your own investment, legal and tax professionals about your specific tax situation.
*Not all annuities provide these options, and some may offer different payouts. All guarantees are subject to the claims-paying ability of the issuing insurance company.