Payout options in the realm of annuities tend to be guaranteed by the insurance company providing the annuity, and may come in many forms depending on the investor’s preference.
Annuities can pay income to the annuitant in a few ways. One of the ways is to turn the entire balance of the annuity into a pension-like income stream for life, or jointly on two lives.
The payout tends to be higher than the safe withdrawal rate than investors can use in an investment account, and it provide guarantees and surety where it wouldn’t exist otherwise. You can also elect to have these payments start off slightly lower, and then to increase at a guaranteed rate, to keep up with the cost of living.
Another option, which can be present in variable annuities and fixed annuities, is to turn only a portion of the balance into an income stream, whether now or in the future, and thereby allow the account to be partially liquid to the owner, since annuities are very illiquid once income payments start.
If on a joint life, you could elect to have the survivor paid a percentage of the original monthly benefit. Or, you can elect a “life with period certain” option, to guarantee that income is provided for a certain number of years, even if the annuitant has died.
The other options for beneficiaries include Life with Cash Refund, or Life with Installment Refund, both of which will pay the remaining principal balance to your beneficiaries if you do not outlast it.
There is also the Life Only option, which has the highest payout, because it releases the insurer from any further payments or obligations once the annuitant has died, even if it is right after the income payments have started.
On period income annuities, you can elect to take the balance as a series of payments for a set number of years, which depletes the principal amount in the account and any interest credited to it.
One of the interesting features of annuity contracts is that the lump sum no longer belongs to the annuitant, legally, once it has been exchanged for a stream of income. This can be an asset protection and preservation strategy to those seeking to keep assets out of consideration for lawsuits, Medicaid eligibility, and other situations.
Another option would be to take the entire accumulation amount out of the annuity as a lump sum, and either roll it into another annuity product or pay taxes on the gains.
Lastly, it is also common to take random, non-recurring withdrawals from the accumulated balance in the account, but it is worth remembering that non-periodic withdrawals are taxed on the gains first, in a Last-in first-out (LIFO) methodology.
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