How To Compare Your Annuity Payment Options

There are several annuity payment options that are available to an annuitant. These options determine how payments are made and for what duration. The different options will also impact the way in which the insurer calculates the payment and what the amount of that payment will be.

The various options that are available to an annuitant when receiving a payment stream from their annuity includes lump sum, life income only payment, life income with period certain payment, joint life payment and survivorship life.

Lump Sum

A lump sum annuity payment is simply that. It is one payment paid out to the annuitant at the time that they are permitted to annuitize their annuity. In most cases annuitization or the payout phase cannot take place before the annuitant reaches age 59-1/2 years old.

A lump sum payment will result in the largest tax liability for the annuitant since the amount that they receive includes a tax-free return of the principal amount paid into the annuity and a taxable portion of growth and earnings that grew tax-deferred during the accumulation period.

Life Income Only Payment

Life income only payments of an annuity are the greatest benefit of owning an annuity.  The insurance company, based on the actuarial life of the annuitant (life expectancy) calculates a payment stream guaranteed for the lifetime of the annuitant. Although insurance companies are pretty accurate in determining when a person is likely to die, if a person lives longer than their actuarial life, the insurance company is obligated to continue paying the annuitant. Theoretically, an annuitant could receive a payment for many years longer that when they are expected to die, even if the annuity balance runs out.

Life Income with Period Certain Payment

A life income with period certain payment is a type of annuity payment that represents a hedge for both the annuitant and the insurance company. The insurance company, under this payment structure, agrees to pay the annuitant a stream of income for a certain period of time. If the annuitant dies within that period certain, the insurance company’s payments are limited to that time frame. If the annuitant lives beyond the period certain, the insurance company must continue to pay.

An example would be an annuitant who chooses an annuity payment option of life income, 20-year period certain. The payments to the annuitant will be calculated on the annuitant living 20 years (resulting in a higher payment than life income only).  If the annuitant lives beyond 20 years, payments will continue by the insurance company.

Joint Life Payment

Joint life payments are based on 2 or more lives whereby when the first annuitant dies, payments seize. Since the annuity payment is based on multiple lives the payment amount will be the largest of all annuity payment options. This is also referred to as 1st-to-Die payments.

Survivorship Life Payment

Survivorship life, which is also based on 2 or more lives, is known as 2nd-to-Die payments. When the death of the first annuitant occurs, a smaller payment is made to the surviving annuitant(s). When the last survivor dies, payments cease.

The annuity payment option that is right for you depends on your needs in retirement and how the payments will be used. Discussing the options for an annuity payment with a qualified and licensed insurance agent or financial planner will help bring clarity to your situation and determine the best option for you.

 

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