An annuity has an accumulation phase and a payout phase. An annuitant builds up his annuity fund during the accumulation phase. He can deposit cash, move money from one annuity to the other, or convert his insurance cash values and put it in his annuity fund. Earnings from the fund are usually tax-deferred unless the annuitant makes a withdrawal. Upon reaching 59.5 years old, the annuitant can start receiving his payouts already without being penalized.
An annuitant can take advantage of any of the following annuitization methods: life option; joint life option; period certain; life with guaranteed term; systematic withdrawal schedule; and lump sum payment. Life option offers the highest payouts because the amount of monthly payments is based on the life expectancy of the annuitant. Anyone who wants a steady income even when he retires must take advantage of this.
A joint-life option allows the annuitant to receive a steady source of income during his retirement. If he dies, his spouse can enjoy the remaining payouts. In general, the monthly payout is lower because it is based on the life expectancy of both spouses.
Period certain is an alternative wherein the amount of annuity is paid over a pre-defined period, which may be 10, 15, or 20 years. For example, the annuitant opts for a 20-year period certain and he dies before the end of the period, his beneficiary can continue to receive the payouts up to the 20th year.
Life with guaranteed term is a payout option which allows the annuitant to enjoy his payouts while he’s still alive. The guaranteed term, on the other hand, is a period which the insurer must distribute payouts to the beneficiary up to the end of the guaranteed term. For example, the guaranteed term is 10 years. This means that the insurer has to pay the beneficiary for 10 years commencing on the death of the annuitant.
Systematic withdrawal schedule, on the other hand, allows the annuitant to choose a payment amount he wants to receive on a monthly basis and how many of months he wants to receive it. However, the amount and term of payments aren’t guaranteed. They depend on the amount of money the annuitant has in his annuity account.
Lastly, the lump sum payment is paid one time only. For this type of payout option, the annuitant must be ready to pay ordinary income taxes on the gains of the annuity account. This isn’t usually recommended because from the tax perspective a lump sum payment is inefficient.
There are annuitants who may not need the regular income from their annuity fund. They may not accept the payouts. If this is the case, they must ensure that their annuities have the correct beneficiary so that the latter can receive the payouts when the annuitant dies.