Annuity Payout Options: Choosing Between Immediate and Deferred Annuities

Duration of Annuity Payments

Now that we have looked at two annuity payout options, there are a few more factors to consider – the duration of your retirement income payments.

Annuity payouts are further divided into options or riders you can choose to have:

• Single life annuity – A single or straight life annuity provides income payments only to the annuitant for the duration of their life. In case of death and if the annuity owner doesn’t receive the entire premium, the insurance company keeps the remaining amount. Note that this annuity is limited to one person with no death benefit or beneficiaries.
• Life annuity with a fixed period – Period-certain annuities provide an additional source of income to one person for a predefined period of years (typically, for 10, 115, or 20 years). Unlike a single life annuity, if an annuitant dies before the end of the term, their beneficiary can claim the remaining payments.
• Joint and survivor annuity – A joint and survivor annuity provides guaranteed income payment for the annuity owner and their partner. Upon the death of an annuitant, their partner continues receiving the rest of the payment amount.
• Lump sum payment – One lump sum payment may look like the best option of all, but it does come with its flaws. Although you can get the entire annuity as a one-time payment, the IRS will require income taxes to be paid in the same year you receive the money.
• Systematic annuity withdrawal – A systematic annuity withdrawal highly depends on the cash value of your annuity contract. You can choose the frequency and amount you want to withdraw. If you are looking for a lifetime income stream, we would recommend considering other annuity payout options.
• Early withdrawal – Choosing lifetime payout options, we often overlook the possibility of early withdrawal. Although there is a possibility to withdraw your annuity early, you might want to refrain from doing it. Here is why: if you withdraw your money before the age of 59 ½, you will pay a penalty of 10%. Additionally, there may be applied up to 20% charge from your insurance company.Hence, it’s better to wait until you are 59 ½ before withdrawing money from your annuity penalty-free.
• Death benefit – Depending on your annuity contract, you may have a death benefit included or purchase it additionally as a rider. Upon your death, your beneficiary will be able to claim the death benefit, either as a one-time lump sum payment or a series of payments.

How Much Money Can You Receive Monthly?

The most popular question about life annuities is the amount you are going to receive because the main purpose of investing is to generate wealth and use it for your retirement.

Annuity payments highly depend on two major factors: age and gender. Both affect your life expectancy. Women typically live longer than men; hence, their monthly payments will be lower than their counterparts.

The older you are, the higher premium you are entitled to. A 75-year-old annuity owner will receive a higher stream of income than a 65-year-old applicant.

Next, your annuity type will affect how much money you will receive. For example, the highest-paid annuity is a single life annuity because the company keeps the remaining amount of the annuity after your death since there is no designated beneficiary.

Taxable Income

One part of your income is considered the return of your initial contribution to the annuity and is free of tax. However, the other part is taxable income. Before agreeing on an annuity, you should request an exclusion rate. It will indicate what amount is taxable. For example, if your annuity payment amount is $1,000 and only 70% is your exclusion rate, $300 will be taxed.

As we’ve mentioned earlier, withdrawing annuity payments before you are 59 ½ is also subject to a 10% penalty and a possible up to 20% surrender charge.