At first glance, annuities might seem complicated, but they don’t have to be. As contracts between you and an insurer, annuities offer a lump sum or steady income stream in retirement.
However, the true power of this retirement planning tool lies in your hands, allowing you to tailor your annuity payout options to your needs and goals. Of course, taxes are always a consideration. Typically, you only pay taxes on the gains of nonqualified annuities (funded with after-tax dollars), while you pay taxes on the entire payment amount of qualified annuities (funded with pretax dollars). Accordingly, consider the tax implications of your payout option.
Here’s a look at the available options to help you choose a solution that aligns with your retirement vision.
Single Life (or Life Only) Annuity
A single life annuity—also known as a life only annuity—provides a guaranteed income stream for your lifetime. Your life expectancy primarily determines your payment amount. If you outlive your life expectancy, you could receive more than the annuity’s total accumulated value. Even so, a single life annuity payout option is usually the most affordable option.
Who It’s Best Suited For
A single life annuity can offer financial security if you’re seeking a reliable, lifelong income. Knowing you’ll have a steady retirement income stream for the rest of your life can offer peace of mind.
Pros
Guaranteed Lifetime Income
This annuity gives you guaranteed lifetime income for as long as you live.
Higher Payouts
Because payments stop when you die, they’re often higher than joint life annuities or those with beneficiary options.
Cons
No Survivors Benefit
Once you die, the income ends without paying beneficiaries.
Potential for Loss
If you die shortly after purchasing the annuity, the total amount you receive could be significantly less than the initial investment.
Systematic Withdrawal Annuity
A systematic withdrawal payout option lets you choose the monthly payment amount. Your monthly payments continue until you exhaust all the funds in the annuity. As a result, you aren’t guaranteed lifetime income and could outlive your annuity payments.
Who It’s Best Suited For
A systematic withdrawal annuity is a good option if you’re not concerned about outliving your income. It lets you tailor your income to your retirement lifestyle and goals.
Pros
Predictable Income Stream
This annuity gives you a predictable monthly income stream that can make managing living expenses and budgeting easier.
Flexibility
You can tailor your payment frequency and amount based on your needs.
Cons
Risk of Outliving Your Annuity
You could outlive your funds if you withdraw too much or your investments perform poorly.
Market Risk
Poor market performance can reduce your principal more quickly.
Period Certain (or Fixed Period) Annuity
With a period certain annuity—also known as a fixed period annuity—you determine when you’ll receive payments, such as 10, 15, or 20 years. If you die before this period ends, your beneficiaries receive the remaining payments.
Who It’s Best Suited For
If you want guaranteed income over a specific period, the period certain annuity payout option may suit your needs. However, this option may not be ideal if you desire guaranteed lifetime income.
Pros
Guaranteed Income
You set your payment schedule and how long it lasts.
Beneficiary Protection
If you die before the period ends, your remaining payments go to your named beneficiary.
Cons
No Lifetime Income
Your payments stop at the end of the period even if you or another annuitant are still alive.
No Survivors’ Benefit beyond the Period
If the fixed period ends, neither you nor the beneficiaries receive income from the annuity.
Life Annuity with Period Certain
A life annuity with period certain combines the lifetime income guarantee with a period certain guarantee. If you die within the guaranteed period, your beneficiaries continue receiving payments for the remaining time.
Who It’s Best Suited For
A life annuity with period certain can be a good choice if you want lifetime income while ensuring your beneficiaries receive a benefit if you pass away early.
Pros
Lifetime Income
It provides a guaranteed income stream for you and another annuitant.
Beneficiary Protection
The period certain feature protects a beneficiary if you die before the guaranteed period ends. The remaining payments continue to the beneficiary.
Cons
Potentially Lower Payments
These annuities guarantee payments for your lifetime and an additional period. The payment is usually less than a life annuity without a period certain feature.
Additional Costs
The annuity increases complexity and costs by adding a period certain feature.
Joint and Survivor Life Annuity
A joint and survivor life annuity provides payments for as long as you and a named survivor are alive.
Who It’s Best Suited For
This annuity payout option can be well suited for couples who want to ensure continued financial support for the surviving partner without consideration for other beneficiaries.
Pros
Lifetime Income for You and Another Annuitant
This annuity guarantees that as long as you or the other annuitant are alive, you’ll enjoy lifetime income.
Flexible and Customizable Payout Options
You can customize your payout options, such as 50% of the payment to the survivor.
Cons
Lower Monthly Payments
Because the annuity works for the lifetimes of two people, the payments can be less than a single life annuity payout option.
Potential Lower Total Return
If both annuitants pass away earlier than anticipated, the total payout could be less than expected.
Joint Life with Period Certain
A joint life with period certain annuity combines lifetime income for you and another person with a period certain guarantee, such as five, 10, or 20 years. If both annuitants die within the guaranteed time frame, payments continue to the account’s beneficiary for the remaining period.
Who It’s Best Suited For
A joint life annuity with period certain can be a strong choice for couples who want guaranteed lifetime income and the ability to provide financial support for loved ones over a specific period.
Pros
Guaranteed Income for Two
This annuity offers guaranteed income as long as either annuitant lives.
Protection for Beneficiaries
The beneficiary receives the remaining payments if both annuitants die before the guaranteed period ends.
Cons
Lower Payments
Because payments are guaranteed for the lifetime of two annuitants and include a period certain feature, the monthly payments are usually lower than a single life or joint life annuity without this feature.
Cost and Complexity
These annuities are often more complex and have higher associated fees. And if both annuitants live beyond the guaranteed period, the extra cost is unnecessary.
Lump-Sum Annuity
As its name implies, a lump-sum annuity pays the entire balance in a single lump sum.
Who It’s Best Suited For
The lump-sum payout option may work for you if you have a clear plan for the funds.
Pros
Instant Access to Funds
You gain access to your annuity’s entire value.
Investment Flexibility
When you receive the lump sum, you can reinvest the funds into another asset or product that aligns with your financial goals.
Cons
Tax Implications
Lump-sum payouts are usually subject to a substantial tax liability in the year they’re received. It could push you into a higher tax bracket, reducing your annuity’s overall value.
No Guaranteed Income
Many people opt for annuities because they provide a reliable income stream. A lump-sum payout option negates this benefit.
Simplifying Your Annuity Payout Decision
Understanding annuity payout options can help you select the right choice for your situation. While the array of choices might seem dizzying, remember you’re not alone in this journey. Bankers Life is with you every step of the way. Contact a financial representative for guidance around building a retirement plan that gives you peace of mind and financial stability for years.
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Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.
Bankers Life Securities, Inc., Bankers Life Advisory Services, Inc., and their representatives do not provide legal or tax advice. Each individual should seek specific advice from their own tax or legal advisors.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Bankers Life is the marketing brand of various affiliated companies of CNO Financial Group including, Bankers Life and Casualty Company, Bankers Life Securities, Inc., and Bankers Life Advisory Services, Inc. Non-affiliated insurance products are offered through Bankers Life Securities General Agency, Inc., (dba BL General Insurance Agency, Inc., AK, AL, CA, NV, PA).
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