Annuities are retirement savings products offered by life insurance companies. You can make a single or periodic deposits and have your earnings grow tax-deferred in many cases.
This series looks at the basics of annuities for retirement planning purposes. Links at the end of the article take you to previous installments.
The flexibility of payments is one of the most attractive features of annuities. This article looks at the basics of how you can structure payouts. Because of the wide differences in features, be sure you understand all of the benefits, options and expenses before buying an annuity.
The flexibility of annuities allows you to structure a retirement income stream to meet your needs by combining different payout scenarios. However, it is important to note that once a payout has started, it is usually impossible to change.
You can base periodic payments on an amount of time or money or both.
Fixed Period Certain
Fixed periods certain payout guarantees payments continue for a specified number of years. This option is helpful in planning to cover a known expense, for example, or to cover a period when you anticipate extra expenses in retirement.
For example, you still have 15 years left on your mortgage. To ensure you can always make the payments, you might buy an annuity that would pay enough to cover your mortgage payment with a period certain of 15 years.
This payout continues to your heirs if you die before the period certain is up. The downside is that when the period certain is up, so is your money, so be sure you understand and use this payout correctly.
Fixed Amount Certain
A fixed amount certain annuity is like working the problem backward. With this payout option, you know the monthly income you need and the amount of money you have to invest, and you're buying an annuity that will stretch those monthly payments as far as possible.
Annuity salespeople have calculators that can figure almost any scenario you need. (You can also find them online.) Although many companies don't specifically sell a "fixed amount certain" annuity, they can achieve the same results with a few simulations on their computer.
Payments for Life
Single life payouts provide an income for the life of the annuitant/owner. Joint and survivor options consider the lives of both partners in calculating the monthly income benefit and give you some options regarding what happens if one partner dies.
The joint and survivor option means that both share the benefit when alive and the surviving partner continues the benefit in some form after the other's death. It also means a lower monthly payment than an annuity that covers just one person's life.
The lifetime income payout guarantees you an income for the rest of your life, no matter how long you live. For example, if you choose this payout option at age 65, you will receive a check (usually monthly, but some contracts pay semi-annually or quarterly) for the rest of your life. If you live to be 85, 95, or 105, you will still receive the same payment.
On the other hand, if you die at age 66, the contract ends, and the insurance company keeps the rest of your money. Most single lifetime income payouts carry no death benefit. Nothing passes to your heirs.
Refund Lifetime Income Annuity
A refund lifetime income annuity has the same payout schedule as a simple lifetime income, except if you die before withdrawing a sum equal to your original premium; the beneficiary would receive the difference.
This option guarantees that either you or the beneficiary will benefit from your original premium and not the life insurance company. Of course, this option comes with a price in the form of lower monthly payments than the straight lifetime income payout option.
Lifetime with Period Certain
This lifetime income payout guarantees that payments will continue for a certain number of years even if you die. This option is offered in five-year increments and might be stated like this: Single life with X years certain. The "X" might be 5, 10, 15, or 20 years.
This payout guarantees a level income for your lifetime; however, if you die before the "X" years certain are up, your beneficiary will receive the remainder of the payments to complete the certain period.
Joint and Survivor
The joint and survivor payout continues the monthly payment after a spouse's death. With the 100 percent option, the surviving spouse will continue to receive the same benefit as before the other's death.
This option protects the surviving spouse in two ways. First, it continues the income stream uninterrupted. Secondly, the benefit is not part of the deceased estate and is not subject to the complications of probate.
Other survivor payout options adjust the payment based on which partner dies first.
As a general rule, the more options you add, the lower the monthly benefit will be and the higher the expenses will be. However, annuities are complicated (in part, by their flexibility) and you should find an agent or financial advisor you trust to help you find the right annuity and payout for your circumstances.