Below are some of the most common annuity payouts. Not all annuities provide these options and some may offer different payouts.
Withdrawals
Partial Surrenders
Annuity contracts that have not been annuitized and are in the deferral stage generally have a free withdrawal provision that allows you to take out part of your annuity without a surrender charge (a fee paid to the insurance company for taking out money before the contract has completed its term). You may be able to take, for example, 10% of your contract value per year without a surrender charge (sometimes called the “free amount”). If you withdraw more than the 10%, a charge will be assessed on the amount that you withdraw in excess of the “free amount.”
Systematic Withdrawal Options
You may wish to set up automatic payments from your policy – these might be monthly, quarterly, or annual payments depending upon the options offered by your insurer. The payments continue until you stop them or you run out of money. Unlike annuitization, a systematic withdrawal can be canceled and the insurance company is not guaranteeing that the payments will last for your lifetime.
Full Surrenders / Lump Sum Distributions
This allows you to receive your annuity in one lump sum. In the year you take the lump sum, you'll have to pay income taxes on the entire investment-gain portion of your annuity, so it may be advisable to consult with a tax advisor. Remember that if the funds are qualified (e.g., IRA, 401K), the entire amount will be taxable.
If your contract has completed its term (i.e., it is outside of the surrender charge schedule), the liquidation will not be subject to surrender charges. If your contract has not completed the surrender charge schedule, the insurance company will assess a penalty for getting out of the contract early. These charges vary by policy, so it is important to know what penalties might apply and be cautious if the funds are being used to buy a new product – sometimes waiting a year or two can save you thousands of dollars in fees.
Annuitization Options
Fixed Period (also called Period Certain)
In this option, you choose a defined period (e.g., 10, 15, or 20 years) to receive the payout of your annuity. If you pass away during the period certain, payments after your death may go to your designated beneficiary. Example: If you choose a 15-year fixed-period payout and die within the first 10 years, the contract is guaranteed to pay your beneficiary for the remaining five years.
Joint and Survivor Life
The company pays you or your survivor for as long as either of you lives. The amount of the regular payments are typically smaller than the Life Only option, as the company now pays for the longer of two lifetimes.
Life Only
The company makes payments for as long as you live. The payment amount is mainly decided by life expectancy – the longer your life expectancy, the smaller the payment amount. There is no guarantee you'll get the total amount you accumulate. However, you're guaranteed the income for the rest of your life. If you live a long time, you could receive more than the accumulated value of the annuity.
Life with Period Certain (also called Guaranteed Term)
This gives you an income stream for life, like the Life Only option, but includes a guaranteed period as well. For example, a life with a 10-year period certain means that you will receive payments for your life or 10 years, whichever is greater. If you pass away in year four, your beneficiary will receive the remaining six years of payments.