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What Are Your Annuity Payout Options?

Annuity Payout Options

Let’s say that you stop into a local deli or coffee shop for lunch. Since they only accept cash because they want to avoid processing costs, which are the fees businesses must pay to accept credit or debit cards, you have to take money out from an ATM. 

As you know, you have several options when withdrawing your money at the ATM. You can select the amount, as well as if you want to tap your checking or savings account. 

What Are Your Annuity Payout Options?

In regards to your annuity payout, you also have a lot of flexibility. However, it’s much more complicated than withdrawing $20 for a sandwich. Especially when you consider that investors want their cake and eat it too when it comes to their retirement savings. 

According to a Gallup poll, 85 percent of investors want a guaranteed income in order to supplement Social Security. And half want the freedom to spend their retirement savings however they want. But, only 27 percent want to sacrifice access to some of their entire savings to provide a guaranteed stream of income.

It’s true that in retirement retirees do have to make this unfortunate decision. Can they have unrestrained access to their savings? Or, do they prefer the security of a guaranteed income flow?

This is exactly the case with annuities. While annuities do offer guaranteed lifetime income, access to these funds is limited — at least for a specified period of time. That’s why annuities are considered illiquid and aren’t ideal for financial emergencies. 

At the same time, this won’t be something that your annuity company will keep hidden from you. When you set up your annuity, you have multiple choices when it comes to payment schedules. And, before you make a commitment, you need to clearly understand the pros and cons of each payout structure.

When do you want to start receiving payments?

I know that you’re anxious to find out what your payout options here. But, hold your horses just a minute longer. We first need to briefly refresh you on the phases of your annuity. 

The first phase is the accumulation phase. During this period you can add funds to your annuity contract. Typically, you do this by depositing cash, converting life insurance cash, or doing something called a 1035 exchange. We’ll give you a more detailed explanation of the Annuity Glossary Index. But, for the time being, just know that this is simply moving an existing annuity to another.

The second is the annuitization phase or the payout phase. That means when you’re the age of 59 ½ you can begin making withdrawals from your annuity without getting hit with a penalty.

Both of these phases will be impacted by when you actually being to receive payments. And, this is something you must consider when buying your annuity contract. Do you want to receive payments right away? Or, do you want to wait until a later date? 

Immediate Annuity (Income Annuity)

We’ve previously discussed immediate annuities throughout this guide. Also known as a single premium immediate annuity (SPIA), this type of annuity begins paying income within a year of the purchase date.

Things can get complicated though when it comes to deferred income annuities (DIAs). Even though “deferred” is included in its name, these are simply immediate annuities with delayed payouts. As such, this type will begin paying income at least 20 years after the contract start date.

Yes. This probably is confusing. But, consider DIAs as deferred payments, immediately annuitized annuities. Some experts and salespeople may also refer to these types as “longevity annuities.”

The main takeaway should be this: immediate annuities are designed to generate an income stream for a set time period — regardless of when you begin receiving payments. What’s more, if you’ve purchased an immediate variable annuity the accumulation phase is skipped. The reason being that you contributed a lump sum after which the annuitization phase has begun. 

Deferred Annuity

Unlike an immediate annuity, deferred annuities don’t pay you, the annuitant, until many years after it’s been purchased. Usually, these payments are deferred until you retire. In the meantime, the annuity will grow, And, the interest will accumulate tax-free. 

As a general rule of thumb, the longer you don’t touch your deferred annuity, the more it will grow. And, as a result, the larger the payments will be when they start.

How Long Will Payments Last?

The duration of the annuity’s income stream is another essential consideration. There’s really no right or wrong payout schedule. It ultimately depends on your unique needs and retirement plan. For example, if you’ve recently retired at the age of 62 and are in excellent health, then you may want to purchase a deferred annuity where you’ll begin receiving payments that will last the rest of your life in 15 years. At Due we have annuity payments last for life.

Annuity Payout Options

So, what payout options do you really have? Well, there are actually nine different choices you can select from. 

Single/Life Annuity 

Also known as a straight-life or life-only annuity, this is usually your best option if you’re looking to take the highest payout. The reason? The monthly payment is calculated on the life of the annuitant. That means you’ll receive an income stream for life.

On the other hand, if you’re married or have heirs, this option may not be to your like. That’s more because unlike other annuity options this is limited only to the annuitant. In other words, there’s no option for a survivor benifit meaning that you can not leave the remainder of your balance to beneficiaries or spouses.

What happens if you die before your entire premium is returned to you? In this scenario, the insurance company keeps the remainder. However, there’s a way to reduce the likelihood of such an event. Purchase a life annuity with a period certain.

Joint and Survivor Annuity

Another popular option is the joint-life annuitization option. Unlike a single annuity, it was designed specifically for those who are married. As such, you can pass the annuity income to your spouse if you pass away before they do.

However, the monthly payment is lower than the straight-life annuity or a life annuity with a period certain. Why? The calculation is based on the life expectancy of both you and your spouse. Be aware that you can also choose a reduction in payments (50% to 100%) for the surviving spouse. This will be in exchange for a higher annuity payment upfront.

Moreover, joint and survivor annuities promise lifetime payments for both the annuitant and another person. Typically, this other individual would be a spouse. You also have the option to include a period certain for a beneficiary. This means that the beneficiary would collect the death benefit if both annuitants die prior to the end of the period.

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

Period certain annuities aren’t all that different from straight-life annuities. The main difference is that these include a minimum time period for the payments — typically 10, 15, or 20 years or even if the annuitant dies. If you go with a 15-year period, as an example, and die within the first 10 years, your beneficiary is guaranteed payments for the remaining five years.

Note that by adding a period certain will lower the amount of your monthly payments. Overall, you can think of this option as a hybrid of the Single Life Only Annuity and the Period Certain

Life Annuity with Guaranteed Terms

Do you want to receive an income for the rest of your life? The life option achieves this. But, if you’re concerned about what would happen in the case of an untimely death, then this provides you with some peace of mind.

With the life-with-guaranteed-term option, you’ll not only secure an income stream for life, but you’ll also be able to obtain a guaranteed period of payments. In turn, your estate or beneficiaries will receive payments even if you pass prior to that guaranteed period.

Life Annuity with Cash Refund

“An annuity that makes fixed payments to the annuitant throughout his/her life,” notes the Farlex Financial Dictionary. More importantly, however, it “guarantees the return of the original amount paid into the annuity” As such, “if the annuitant dies before the original amount is paid out, his/her survivors receive the remaining amount.” This difference is paid out to the designated beneficiary in a lump sum.

Also, premiums for refund annuities tend to be higher than for other annuities. 

Life Annuity with Installment Refund

Do you want the lifetime income guarantee, while keeping your money in the family? If yes, you may want to explore the SPIA structuring choice called the “Life with Installment Refund.” 

This option provides the highest lifetime income guarantee, while also contractually assuring that 100% of the initial remaining premium goes to someone in your family or other stated beneficiary

Systematic Annuity Withdrawals

With this option, you have the ability to select the size of your monthly payments — depending on how much you have in the account. You can even choose the number of payments you wish to receive.

Just be aware that the insurance company does not offer guarantees. Specifically, if you don’t outlive your income payments. What exactly does this mean? You aren’t guaranteed a lifetime option. Instead, you’ll receive payments until the cash value of your contract runs out. 


To counteract inflation, Social Security includes a cost-of-living-adjustment. Usually, this is a percentage increase operationalized in a cost-of-living index. But, did you know that annuities have a similar option?

Most annuitizations permit you to elect an optional Cost of Living Adjustment (COLA) to your annuity payments. If you select this option, your payments will be lower than most other payments. But, they will increase annually in order to mimic inflation. 

Also, you usually get to choose how much of an increase you would like to receive each year.

Lump-sum payment.

Annuity Experts suggest that you do not take one lump sum, aka receiving the entire value of the annuity at one time. That’s because you’ll be responsible for income taxes in the year you take this payout. Even worse, these taxes will be due on the entire investment-gain portion of your annuity.

Annuity Payout Options FAQ’s

How are your monthly payments computed? 

Factors like age and gender play an important role. For example, because women typically have a longer life expectancy than men, their monthly payments will not be as high.

Additionally, your payment options are also a factor. And, so is the insurance company that you work with. If they can make a higher return, then your payments will be higher. If you don’t mind doing the math, Due has formulas that you can use to figure out your present and future value of annuities with our simple annuity calculator.

But, your best bet is to work with a financial advisor to guide you through this.

Why should I annuitize?

In short, you’re guaranteeing an income stream for the rest of your life. Or, if you prefer, for a fixed period of time. To put it another way, annuitization is adding an extra layer of retirement income to supplement income from other sources like Social Security or a pension.

If an annuitant dies before annuitization occurs what will the beneficiary receive?

Usually, the account value of the annuity will be distributed to the designated beneficiary. It’s the norm for the annuity difference to be distributed in a lump sump sum. However, there are annuity contracts, such as Life with Installment Refund, that will distribute the annuity’s value over a fixed period of time to the beneficiary.

Can I change my mind after annuitizing?

Unfortunately, no. 

Once you make the decision to annuitize the annuity it’s set-in-stone. Additionally, you can’t switch your annuity payment option either. It’s also difficult to withdraw additional funds from your annuity as well — you may be allowed a certain percentage or have to pay a surrender charge. With that in mind, always have liquid funds on hand just in case of an emergency.

What is the annuitization period?

The annuitization period is the timeframe an annuity distributes a series of payments to the contract owner. The annuitization period kicks in once the owner has received the first payment from the annuity.

Do annuities have declared dividends?

Remember, annuities are not the same as stocks. Unlike annuities, you must pay dividends and capital gains if you own stocks. 

Annuity payments are fixed ahead of time, think fixed annuities. Or, they’re tied to the performance of an index or stock portfolio, like indexed and variable annuities. As such, you do not pay dividends on an annuity.

Why is the insurance company’s credit rating important?

An insurance company’s credit rating indicates the solvency, financial strength, and ability to pay policyholder claims of an insurance company. These ratings are often issued by an independent agency, such as A.M. Best, Moody’s, Standard & Poor’s, and Fitch.

While each agency has its own rating system, you want to only work with a company that has high scores. For example, A++ is A.M. Best’s highest insurance company credit rating. For Moody’s Aaa highest quality, Fitch’s is AAA, and Standard & Poor’s is AAA. 

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