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If you’re receiving, or considering, and annuity, one of the top-of-mind questions you may have is probably “how do I get my money?” Let’s explore the various payout structures, timing mechanisms, and factors that can influence your annuity payments.
Annuities 101
Annuities are financial products designed to provide regular income payments, typically during retirement. They are essentially a contract between you and an insurance company where you make one or more payments in exchange for regular disbursements that can begin immediately or at some future date. The insurance company invests your money and, in return, provides guaranteed income payments according to the terms of your contract.
The type of annuity you have will dictate how you receive your money:
Immediate annuities
How they work: You make a lump-sum payment to the insurance company and begin receiving payments almost immediately, typically within 30 days to one year.
Payout characteristics:
- Fixed payment amounts based on your initial investment
- Payments begin quickly after purchase
- Generally provide higher initial payments than deferred annuities
- Payment amounts are determined by current interest rates at the time of purchase
Deferred annuities
How they work: You make payments over time during an accumulation phase, and the annuity grows tax-deferred until you begin receiving payments during the distribution phase.
Payout characteristics:
- Payments begin at a future date you specify
- Two distinct phases: accumulation and distribution
- Potential for higher total payouts due to compound growth
- More flexibility in timing when payments begin
Fixed annuities
Payout structure:
- Guaranteed minimum interest rate during accumulation
- Predetermined payment amounts during distribution
- Payments remain constant throughout the payout period
- Protection against market volatility
Payment calculation: Based on the accumulated value, your age, chosen payout period, and the insurance company’s current interest rates.
Variable annuities
Payout structure:
- Payments fluctuate based on investment performance
- You choose from various investment options (subaccounts)
- Potential for higher returns but also higher risk
- Some offer guaranteed minimum withdrawal benefits
Payment variability: Monthly payments can increase or decrease based on the performance of underlying investments.
Indexed annuities
Payout structure:
- Returns tied to a market index (like the S&P 500)
- Guaranteed minimum return with potential for higher gains
- Protection against market downturns
- Caps on maximum returns
Annuity payout options
Now that you have a better understanding of how the various types of annuities pay out, let’s take a closer look at what your options are:
Life-only payout (straight life)
How it works: Payments continue for your entire lifetime, regardless of how long you live.
Advantages:
- Highest monthly payment amount
- Complete protection against longevity risk
- Simple structure
Disadvantages:
- No payments to beneficiaries after death
- No refund of unused principal
Joint and survivor payout
How it works: Payments continue for the lifetime of both you and your spouse or partner.
Variations:
- Joint and 100% survivor: Full payments continue to the surviving spouse
- Joint and 50% survivor: Payments reduce to 50% for the surviving spouse
- Joint and 75% survivor: Payments reduce to 75% for the surviving spouse
Trade-offs: Lower initial payments in exchange for continued income for the surviving spouse.
Period certain payout
How it works: Payments are guaranteed for a specific number of years, regardless of whether you’re alive.
Common periods:
- 10 years certain
- 15 years certain
- 20 years certain
Beneficiary protection: If you die before the certain period ends, payments continue to your beneficiaries.
Life with period certain
How it works: Combines lifetime payments with a guaranteed minimum payment period.
Example: Life with 10 years certain means payments continue for your lifetime, but if you die within the first 10 years, payments continue to your beneficiaries for the remainder of the 10-year period.
Installment refund
How it works: Payments continue for life, but if you die before receiving payments equal to your initial investment, the remaining balance goes to your beneficiaries.
Cash refund
How It Works: Similar to installment refund, but beneficiaries receive the remaining balance as a lump sum rather than continued payments.
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Factors affecting payout amounts
Now that you know more about your payment options, let’s examine the various factors that can influence your annuities:
Age at payout
Impact: Older individuals receive higher monthly payments because their life expectancy is shorter.
Example: A 70-year-old will receive significantly higher monthly payments than a 60-year-old with the same account value.
Gender
Historical impact: Insurance companies traditionally used gender-based mortality tables, with women receiving lower payments due to longer life expectancy.
Current trends: Many states now require unisex pricing for annuities.
Interest rate environment
High interest rates: Result in higher annuity payments because insurance companies can earn more on invested funds.
Low interest rates: Lead to lower annuity payments as insurance companies earn less on investments.
Payout option selected
Risk vs. reward: Options that transfer more risk to the insurance company (like lifetime payments) generally offer higher monthly amounts than options that provide more guarantees to beneficiaries.
Health status
Medically underwritten annuities: Some insurance companies offer higher payments to individuals with shorter life expectancies due to health conditions.
The annuitization process
Let’s break down the typical steps involved with receiving your payments:
Step 1: Decision to annuitize
You decide to convert your accumulated annuity value into a stream of income payments. This decision is typically irreversible.
Step 2: Payout option selection
Choose from available payout options based on your financial needs, family situation, and risk tolerance.
Step 3: Payment calculation
The insurance company calculates your payment amount based on:
- Your accumulated account value
- Your age and life expectancy
- Selected payout option
- Current interest rates
- Company’s mortality assumptions
Step 4: Payment commencement
Regular payments begin according to your chosen schedule (monthly, quarterly, or annually).
Payment timing and frequency
So, now that you understand the How, what about the When?
Monthly payments
Most common: Provides steady monthly income similar to a paycheck.
Advantages:
- Regular cash flow for budgeting
- Higher total annual payments (due to more frequent compounding)
Quarterly payments
Moderate frequency: Payments every three months.
Suitable for: Those who prefer less frequent but larger payments.
Annual payments
Least common: One payment per year.
Considerations:
- Requires more careful budgeting
- Slightly lower total annual payments
- May be suitable for those with other regular income sources
Modern annuity features
Let’s take a look at some of the more recent features annuities come with:
Guaranteed minimum withdrawal benefits (GMWBs)
Flexibility: Allows systematic withdrawals without full annuitization.
Guarantees: Provides minimum withdrawal amounts regardless of account performance.
Living benefits
Long-term care: Some annuities provide enhanced benefits for long-term care expenses.
Terminal illness: Accelerated benefits for terminal illnesses.
Flexible payout options
Step-up payments: Payments that increase over time.
Seasonal adjustments: Different payment amounts during different times of the year.
The takeaway
Understanding how annuities pay out is essential for making informed retirement planning decisions. The payout structure you choose should align with your financial goals, risk tolerance, and family situation. While annuities can provide valuable guaranteed income during retirement, they should be considered as part of a comprehensive retirement strategy that includes other investments and income sources.
Remember that annuity contracts are complex financial products, and the specific terms and conditions can vary significantly between different companies and products. Always read the contract carefully and consider consulting with a financial advisor or attorney before making significant annuity purchases.
Let Peachtree help
At Peachtree Financial Solutions, we’ve helped thousands of people get their money sooner by purchasing their future annuity payments for a lump sum of cash. Selling your payments is a regulated process and we have a lot of experience with these transactions. And while every annuity is unique, which means every payment sale will be different, they all have the same basic five steps:
- Call one of our representatives.
- Receive a free, no-obligation quote for the sale of your payments.
- Review and sign the purchase agreement.
- We process the agreement with your insurance company.
- You get your cash!
Why should you choose Peachtree?
It’s all part of something we call the Peachtree Promise: our experienced, dedicated representatives listen to your goals and clearly explain your available options. We meet you where you are without judgement and work hard to help you meet your financial goals. Getting your quote is completely free, and you’re under no obligation to sell to us if you aren’t completely satisfied with what you hear.
Call 1-855-680-4121 and speak with a representative today!
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
