How to Understand Annuity Payment Terms

Life-Only, Joint-Life, and Term Certain

Arrows representing annuity term options.
Choose an annuity term that fits your longevity and marital status. Getty Images/Jamtoons

When you receive income from an immediate annuity, or from a pension that pays benefits in the form of an annuity, you must choose the term of the payments. Below are the three most common choices.

Life Only Annuity Payments

Life-only payments continue as long as you live - but stop immediately upon your death. Even if you live forty or fifty years the guaranteed payments will continue, provided the insurance company stays in business.

Caution: If you choose a life-only option, and pass away one year later, the insurance company does not return the rest of your principal to your heirs unless you have chosen a principal refund option, which of course costs more. This makes life-only annuity payments a better choice for singles with no children, but not a great choice for married couples.

A life-only annuity term will result in a higher monthly income stream than a joint-life term.

Joint-Life Annuity Payments

Typically for couples; joint-life annuity payments are structured in a similar manner as life-only, but payments will continue as long as either spouse lives.

Although you will get a lower monthly income than with a life-only option, the joint-life annuity option ensures that income will continue to a surviving spouse.

Many pension plans offer a variation of joint-life payments, which allow you to continue 50% of the benefit, or 75% of the benefit to a surviving spouse, instead of 100% of the benefit.

This option could be used if the spouse would need a portion of your pension income upon your death, but not all of it.

If you choose 100% of the benefit to continue to a surviving spouse you will receive a slightly lower monthly income than if you choose only 50% to continue to a surviving spouse.

If you are married and need to make a decision about how your pension benefits will pay out, be sure to study all the pension survivor benefit options offered to become familiar with the features, benefits, and drawbacks.

Term Certain Annuity Payments

A ten-year term certain annuity payout means that payments are guaranteed to be made for a minimum of ten years. If you were to pass away during the first year, payments would continue to your named beneficiary until ten years from the first payment had passed.

After the initial ten years, payments stop. Term certain annuities can be a good way to provide income in situations where you have a secondary source of income that will start at a later date.

For example, suppose you retire at 60, but your pension benefit will not start until age 65. You could consider purchasing a five-year term certain annuity to provide income for the five years between age 60 and age 65.

Term certain payouts can also be a good choice for a younger spouse where it is most likely they will be the longest lived; the term certain provides some security for the older spouse just in case the younger should pass first.