Annuities are amazing financial products. They let you kick back, relax, and stop worrying about your retirement savings. An insurance company takes over management of your funds, and guarantees a monthly income for life. But just because annuities are great products doesn’t mean all annuities are right for you. There are actually several different ways to structure your annuity payments. The “Pay-Out” or “Distribution Phase” of an annuity can be handled in a variety of different ways depending on your individual needs and each has its own advantages and disadvantages.
Straight Life Annuity
A straight life annuity generates income for you for your entire life, regardless of how long you live. These annuities are popular among people who don’t expect to leave an inheritance and want to maximize income during their lifetime. If you plan on living a very long time, a straight life annuity will prevent you from running out of money.
Even if the annuity’s value is depleted, you’ll keep receiving payments until you die.
Life Annuity With Pop-Up Option or Refund
Lifetime annuities have a major drawback. If you die prior to exhausting all of the funds in the account, the insurer keeps the difference. This is pretty distasteful for most people. That’s why insurers also offer a “pop-up” option with some annuities. The “pop-up” provision is common in pension plans and allows your heirs to receive a refund of all of the money left in the annuity when you die.
So, for example, if the purchase price of the annuity was $1 million, and you die with $250,000 left in the annuity contract, the insurer would pay out $250,000 to your heirs. This is an attractive option if you don’t want to try getting cash for annuities while you’re still alive to ensure your heirs get something.
Another option that most people don’t consider is to combine two different products which can allow you to “have your cake and eat it too”. It is easy to buy a separate prepaid whole life policy in addition to your annuity. So if you took say $25,000 out of your annuity you might be able to buy a $250,000 life insurance policy and keep the remaining money to fund the annuity. Often by separating the products you can get a better deal than by combining them.
Life Annuity With Period Certain
A period certain annuity is a contract that guarantees payment for a specific number of years. Payments must be made during the agreed upon payment period. If you die during the payment period, your heirs continue receiving payments until the payment period ends but you will receive less in each payment so you need to compare how much you will receive under this method.
Life Annuity With Amount Certain
This annuity payment option is similar to the period certain annuity with one crucial difference. The insurer makes payments until a specific amount of money has been paid out. This allows the insurer to stretch out the payments over a longer or shorter period of time than a period certain contract. If you pass away prior to the insurer paying out the full amount, your heirs get the remainder of the annuity.
Joint Life Annuities
Joint life annuities focus on paying two people instead of one. If you have a spouse whom you’d like to share your annuity payments with, the insurer will make payments to both of you. With a joint life annuity, the payments stop when the first spouse dies.
However, there is an option with these annuities called “joint life with survivorship.” Under this arrangement, you receive payments for life. When you die, your spouse receives a percentage of your lifetime payment for the remainder of her life. This is a common provision in pension plans to prevent one spouse from being totally disinherited and left to fend for him or herself.
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 About the Author:
Anthony Jensen has been in finance for many years. He is pleased to share his knowledge to help others make the most of their money.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net.
