When investing, it’s essential to consider all factors before spending your capital. And when it comes to life annuities, knowing which annuity payout is the most beneficial will help you get the most out of your savings.

Life annuities are a great investment opportunity to diversify your portfolio and ensure a guaranteed flow of income for the durability of your life. And to achieve the most comfortable life, you should decide which payout to choose.

Fortunately, there are only two options to choose from: immediate or deferred. Though we cannot answer your question with confidence since every case is individual, read on about each payout’s key points and go for the most suitable one.

Immediate Annuity: Most Common Option

When you accumulate retirement savings, it may happen that, with current inflation, the amount of money you have is simply not enough. One of the options to maximize your hard-earned money is to invest. And if you don’t want to wait long years before living the best years of your life, you can consider an immediate annuity.

Immediate annuities are a financial product that should be available at any insurance company. You can purchase an immediate annuity with a lump sum and start receiving a monthly payment within a year.

This is a suitable investment option for people who don’t want to wait until retirement age but instead wish to receive an additional source of income earlier. As a matter of fact, if you are afraid to outlive your annuity, immediate annuities could be a good solution for you.

Deferred Annuity: Investment in Your Future

When configuring your annuity contract, you may also choose the other annuity payout option – deferred annuity payout. This is a good option for people who are willing to let their retirement income grow over the years before actually spending it.

To make the wait worthwhile, you may consider purchasing a deferred annuity in your 50s or 60s so that you will end up with a significant lump of money sent to you monthly.

Immediate vs. Deferred Annuity Payout Options: Summary

Here is a concise comparison table to help you compare two annuity contracts:

Annuity Payout Option Start of Payments Suitable for
Within a year of purchase
People who are retiring soon, want an additional source of income and do not want to outlive their annuity
After a few years or when retirement begins
People who want to generate significantly more money over time tax-free

Duration of Annuity Payments

Now that we have looked at two annuity payout options, there are a few more factors to consider – the duration of your retirement income payments.

Annuity payouts are further divided into options or riders you can choose to have:

  • Single life annuity A single or straight life annuity provides income payments only to the annuitant for the duration of their life. In case of death and if the annuity owner doesn’t receive the entire premium, the insurance company keeps the remaining amount. Note that this annuity is limited to one person with no death benefit or beneficiaries.
  • Life annuity with a fixed period – Period-certain annuities provide an additional source of income to one person for a predefined period of years (typically, for 10, 115, or 20 years). Unlike a single life annuity, if an annuitant dies before the end of the term, their beneficiary can claim the remaining payments.
  • Joint and survivor annuity – A joint and survivor annuity provides guaranteed income payment for the annuity owner and their partner. Upon the death of an annuitant, their partner continues receiving the rest of the payment amount.
  • Lump sum payment – One lump sum payment may look like the best option of all, but it does come with its flaws. Although you can get the entire annuity as a one-time payment, the IRS will require income taxes to be paid in the same year you receive the money.
  • Systematic annuity withdrawal – A systematic annuity withdrawal highly depends on the cash value of your annuity contract. You can choose the frequency and amount you want to withdraw. If you are looking for a lifetime income stream, we would recommend considering other annuity payout options.
  • Early withdrawal – Choosing lifetime payout options, we often overlook the possibility of early withdrawal. Although there is a possibility to withdraw your annuity early, you might want to refrain from doing it. Here is why: if you withdraw your money before the age of 59 ½, you will pay a penalty of 10%. Additionally, there may be applied up to 20% charge from your insurance company.Hence, it’s better to wait until you are 59 ½ before withdrawing money from your annuity penalty-free.
  • Death benefit – Depending on your annuity contract, you may have a death benefit included or purchase it additionally as a rider. Upon your death, your beneficiary will be able to claim the death benefit, either as a one-time lump sum payment or a series of payments.

How Much Money Can You Receive Monthly?

The most popular question about life annuities is the amount you are going to receive because the main purpose of investing is to generate wealth and use it for your retirement.

Annuity payments highly depend on two major factors: age and gender. Both affect your life expectancy. Women typically live longer than men; hence, their monthly payments will be lower than their counterparts.

The older you are, the higher premium you are entitled to. A 75-year-old annuity owner will receive a higher stream of income than a 65-year-old applicant.

Next, your annuity type will affect how much money you will receive. For example, the highest-paid annuity is a single life annuity because the company keeps the remaining amount of the annuity after your death since there is no designated beneficiary.

Taxable Income

One part of your income is considered the return of your initial contribution to the annuity and is free of tax. However, the other part is taxable income. Before agreeing on an annuity, you should request an exclusion rate. It will indicate what amount is taxable. For example, if your annuity payment amount is $1,000 and only 70% is your exclusion rate, $300 will be taxed.

As we’ve mentioned earlier, withdrawing annuity payments before you are 59 ½ is also subject to a 10% penalty and a possible up to 20% surrender charge.

Best Annuity Payout Option

The best annuity payout option is the one that is tailored to your needs and matches your expectations. A life annuity is a scheme you can configure with a death benefit rider or a designated beneficiary with either immediate or later payout.

We highly advise you to read our in-depth review of companies offering immediate and deferred annuities and choose the one matching your criteria.

If you are still unsure which annuity provides the best income for life, feel free to get in touch, and we will answer your questions.

Jeremiah Konger
Jeremiah Konger
CEO at Annuity Association

Jeremiah understood his whole life the importance of community and caring for those who are a part of it. Starting his first business venture at the age of 23, he gained invaluable experience in working with others for a joint purpose.
He founded his first wireless retail business in 2011, expanding it from one store to 12 locations across the state in just three years.
Once he sold his company, Jeremiah began the journey he’s on today, using his talents and experience to work with seniors in order to help them find the best means of financing their retirement plans.

He’s found his true calling working as a proud member of the Annuity Association, assisting retirees in building their safe financial future.