When it’s time to turn your annuity into income, how you receive those payments matters. Annuity settlement options determine the structure of your payouts — whether that’s a steady monthly check for life or a set income stream for a fixed number of years.
Understanding your choices here helps you align your income strategy with your goals, lifestyle, and financial needs. Read on to explore the most common annuity payout options.
How do annuities pay out?
The life of an annuity has two phases:
- The accumulation phase begins from the day you open the annuity until it reaches maturity. This accumulation period usually starts with a lump sum deposit or the first of a series of smaller deposits. In addition to your principal investment, annuities typically gain interest on your funds (unless it’s a fixed annuity).
- The payout phase (also known as annuitization) is when the insurance company converts the wealth in your annuity into a series of payments. This settlement could be a monthly, quarterly, or annual disbursement. The payout can also be a lump sum if the contract allows it.
6 types of annuity payouts
When it’s time to receive your annuity payments, the insurer may offer several options — here are six of the most common ones.
1. Lifetime income annuity (lifetime payout)
With this annuity settlement option, the annuitant receive payments for the rest of the annuitant’s life. If there’s a remaining balance at the death of the annuitant, doesn’t go to a beneficiary.
Say you purchase a lifetime income annuity, and when you turn 65, it begins paying you $2,000 per month. This particular annuity settlement option will continue to pay even if you live to 100. But if you only live a few years after retirement, your balance doesn’t pass to a beneficiary..
2. Joint and survivor annuity
A joint and survivor annuity is a financial product that provides guaranteed income for two individuals for their lifetimes, ensuring that payments continue even after one of them passes away.
Because this option offers coverage for two people, the payout amount is typically lower as it covers two lives. For example, if the payout on a nearly identical lifetime income annuity is $2,000, the similar joint and survivor annuity payments might be $1,600.
3. Fixed-period annuity settlement option (period certain)
A fixed period annuity, also known as a period certain annuity or a fixed term annuity, is a type of annuity that provides guaranteed income payments for a specific number of years. This duration typically ranges from 5 to 20 years If you pass before the term ends, the payments go to a beneficiary.
So if you elect a fixed-period payout option that’s supposed to pay $2,500 per month for 20 years, the insurance company will pay 240 payments even if you pass before the end of the payout period.
4. Fixed amount payout option
A fixed amount payout option allows you to choose the specific amount you want to receive each month (or other chosen frequency) from your annuity. The payments continue until the total value of the annuity is depleted. The duration of these payments is determined by the amount you select and the total value of the annuity at the time you start receiving payouts
For example, you could withdraw $3,000 monthly for 10 years, knowing that your investment will run out at the end of that period. If you’re an older retiree or see a benefit in drawing your money faster, this may be the right payout option.
5. Lump-sum distribution
With many annuities, you can draw all your funds in one lump sum. You might consider the lump-sum payment option if you have significant debt at maturity or want to use those funds for a different investment.
Worth noting: Receiving a large sum of money in a single year can result in substantial taxes.
6. Systematic withdrawals
This type of payout options offers the most flexibility. You’re able to determine your payment amount and the frequency of payment — usually monthly, quarterly, or annually — until your funds are exhausted. This strategy differs from a fixed amount payout because you can increase, decrease, pause, or stop payments altogether (so there’s more flexibility here).
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Factors to consider when choosing an annuity payout option
With long-term financial planning, you must anticipate your future needs. Before committing to a specific type of annuity or settlement option, speak with a financial advisor about your retirement plans and the pros and cons of each payout option.
Here are some factors worth considering when selecting annuity settlement options.
Product options
Your contract will specify what annuity payout options are available. These payout options are often associated with the corresponding annuity products:
- Immediate annuities: Lifetime income, joint and survivor, and fixed-period are common settlement options for an immediate annuity.
- Deferred annuities: Insurance companies often offer systematic withdrawals, lump-sum distribution, and fixed-amount settlements with deferred annuity products.
Inflexibility regarding payouts
Whether you’re able to change your annuity settlement option depends on the language of the contract:
- Irrevocable options: Contracts that involve a guaranteed income stream for life — like life income, joint and survivor, and fixed-period annuities — usually don’t offer payout structure changes.
- Flexible options: Annuities with systematic withdrawals and fixed-amount payout options often allow you to switch the amount or frequency of your payouts or to cash out in a lump sum (with systematic withdrawals being the most flexible).
- Lump-sum options: Some annuities offer you the ability to take a partial or full lump-sum withdrawal. This may be an attractive option if you’re concerned about accessing your money.
Tax implications
The IRS considers annuity payouts as income. You must pay taxes on 100% of your settlement for qualified annuities and the gains portion for non-qualifying annuities.
For example, receiving a lump sum settlement from a $100,000 qualified annuity will increase your yearly income by the full amount. These extra funds may push you into a higher tax bracket, further decreasing the amount of money you keep.
Surrender charges
Insurance companies offer annuities as long-term investments. Most annuity providers include a surrender penalty to discourage you from withdrawing funds before the maturity date. This surrender penalty may fall off after a specified amount of time, but while it’s in effect, it can impact your payout.
If you withdraw funds before you reach the age of 59½, there’s a IRS 10% early distribution penalty. There are some exceptions.
Find the right annuity settlement option for you
Gainbridge offers annuity products and flexible settlement options designed to fit various retirement goals. .
This article is intended for informational and educational purposes only. It is not intended to provided investment, tax, or legal advice. You should consult your advisor about your particular situation.
Annuities issued by Gainbridge Life Insurance Company located in Zionsville, Indiana. Annuities are long term financial products.
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