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annuity retirement finance

How Do Annuity Payout Options Differ?

Annuities are a financial tool that can be used to create reliable income to supplement Social Security during retirement. When you buy an annuity from an insurance company, you will in return receive monthly payouts, starting now or at a specified point in the future. There are different types and many specific variations when it comes to annuities. Each type is designed differently and can help accomplish the unique goal of  the purchaser. If you are considering buying an annuity to create guaranteed income in retirement, one of the most important features to consider is the payout structure. In other words, when will the payments begin, how long will you continue to receive them, and will your beneficiary get anything out of it when you die? In this article, we’ll describe some of the most common ways that annuities pay their owners.

Single-Life Annuitization

This option provides an income stream for the entire life of the annuitant. There are no survivor benefits, meaning you can’t pass the income on to your beneficiary when you die.

Joint-Life Annuitization

This option allows you to transfer the income stream to your spouse upon your death. However, the monthly payment will be lower than it would be for a single-life option because the payment is calculated using the life expectancy of both you and your beneficiary.

Period Certain Annuitization

With this option, your annuity is guaranteed to pay out over a specified period of time (typically over a 10, 15, or 20-year period). If you die during that specified period, the contract will continue to pay your beneficiary for the remainder of the period.

Life + Guaranteed Term

This option may be the right choice if you want to guarantee income for life, but are worried about dying in the near future and not being able to pass the remaining value on to your loved ones. This option will give you income as long as you live, along with a guaranteed term for which your annuity will pay your estate or your beneficiary if you die before that period is over.

Systematic Withdrawals

With this option, you aren’t annuitizing the contract. Instead, you get to choose the payment amount and how many payments you want to receive in total. This option does not guarantee income for life.

Lump Sum

In most cases, it is possible to take out the assets in your annuity as a single lump sum. If you cancel the annuity in the early years of the contract however, you will pay surrender penalties which may reduce your principal value.

All annuity withdrawals are subject to ordinary income taxes, and if taken before age 59 ½, may incur a 10% federal penalty. Annuity guarantees are backed by the financial strength of the claims-paying ability of the issuing company. Everyone who purchases an annuity may have slightly different goals and expectations. You’ll need to evaluate your unique situation with the help of an experienced professional to make the right choice. At Absolute Retirement Solutions, we can help you select an option that has the benefits you need to accomplish your financial goals. Contact us today to schedule an appointment and learn more about your options.