You should be familiar with these four common terms associated with annuity payments.An agreement with a financial institution is what is known as an annuity. You can buy an annuity from an insurance company by making a deposit of funds with them; in exchange, you will be eligible to receive a guaranteed income for a predetermined amount of time. Annuities can either be immediate, in which case the recipient receives income immediately, or deferred, in which case the recipient allows the funds to grow over time and receives the guaranteed income at some point in the future.
You are obligated to select the period of time during which you would like to receive payments from an annuity. This is also true if you have a pension scheme that will pay benefits to you in the form of an annuity when you reach retirement age. Life-only payment, joint-life making a payment, term certain payment, and life payment with term certain are the most frequent types of payment mechanisms.
Key Takeaways
When you acquire an annuity, you will be required to choose the length of the term as well as the frequency of the payments you will get.
Life-only payments will be made to you as long as you are alive, but they will stop as soon as you pass away.
If you are married, considering joint-life payments as an option may be beneficial because these benefits will continue for the duration of both partners’ lives.
Payments under a term-certain arrangement are made for a predetermined period of years and may continue even after the recipient dies.
1. Annuity Payments That Are Guaranteed for Life
Lifetime payments are those that are made to you regardless of how long you live. However, after you pass away, they will immediately cease. Even if you live for another 40 or 50 years after you begin receiving payments, you will still be eligible to receive guaranteed payments. This will be the case so long as the insurance provider continues to conduct business.
Note
In the event that a financial institution goes out of business, policyholders in every state are protected by a mechanism that has been put in place. It is dependent on the legislation of the state in which you reside. However, the amount of money that can be offered to you might be capped at a certain point.
If you decide to go with the life-only option, begin receiving payments, and then die away one year later, your beneficiaries will not get the remaining value of the principal from the insurance policy. You might have the opportunity to buy a principal refund option, but the price of doing so will be higher. It improves the desirability of receiving annuity income for life just for single people who do not have any children. However, it might not be the best option for couples who are already married.
When compared to a joint-and-survivor term, a life-only annuities term will result in a greater amount of money being paid out each month as income.
2. Joint-Life Payments
The majority of the time, couples will use these. Payments for a joint-life annuity are organized in a manner analogous to that of a life-only one. The main distinction is that payments will be made for as long as either of the spouses is still alive.
The joint-life annuity choice ensures that money will continue to be received by a surviving spouse, despite the fact that you will get a lesser monthly income than you would with the life-only option.
There are a lot of different joint-life payment options available through pension plans. Because of this, the survivor spouse can choose to receive either 50% or 75% of the benefit, rather than the full 100%. This choice could be made in the event that the surviving spouse would require some of the income from the pension upon your passing but not all of it.
If you opt to continue 100% of the benefit to a living spouse, you would receive a monthly income that is significantly less than what you would earn if you choose to continue 50% of the benefit to a surviving spouse.
It is imperative that you make a decision on the distribution of your pension benefits if you are married. Make it a point to investigate each and every alternative for the pensions survivor benefit that your business provides. It will assist you in becoming acquainted with the functions, as well as the benefits and drawbacks of the option.
3. Annuity Payments Guaranteed for a Specified Term
These annuity payouts, which are for a predetermined length, are also referred to as period definite payouts. When speaking about an annuity payout, the phrase “10-year term certain” refers to the fact that payments are certain to be made for a minimum of ten years. In the event that you passed away within the first year of the plan, payments would keep on to be made to the beneficiary that you designated up until ten years following the initial payment.
After the first ten years, there will be no further payments. In circumstances in which you will have access to a secondary source of income at a later point in time, term certain annuities can be an effective approach to supplement the income you receive from that secondary source.
For example, let’s say you resign at 60. However, you will not begin receiving benefits from your pension until you reach the age of 65. You should seriously consider purchasing a five-year term guaranteed annuity if you want to have a reliable source of income between the ages of 60 and 65.
Payouts that are guaranteed for a set period of time might also be a desirable option for a younger spouse in situations in which it is probable that they will live for a longer period of time. In the event that the younger spouse passes away before the elder spouse, the term certain offers some measure of protection to the older spouse.
4. Life Insurance With Fixed Monthly Payments
This choice provides a steady income for the rest of your life or for a predetermined amount of time, whichever comes first. You might, for instance, choose life insurance with a period of ten years. You will continue to receive payments for as long as you are alive, even if it’s been 20 years since you first started receiving them.
In the event that you passed away two years into receiving payments, the beneficiary would continue to receive those payments for the remaining eight years of your 10-year tenure.
The Crux of the Matter
Any one of these methods of compensation could be successful. Your age, health, the other money that you have available, and the presence or absence of dependents are some of the factors that will determine which option is in your best interest.
Even though the payout for the life-only option is the greatest, it may be desirable to accept a smaller payment in exchange for the peace of mind that comes with knowing that the payments can continue after your passing.
