An annuity is a contract with an insurance company. You purchase the annuity by depositing funds with the insurance company, and in exchange, you can be paid a guaranteed income for a specific period of time. Annuities can be immediate, which means you receive income right away, or deferred, which means you let the funds grow and take your guaranteed income in the future.
When you receive income from an annuity, or from a pension plan that pays benefits in the form of an annuity, you must choose the term of the payments. The most common payment methods include life-only, joint-life payment, term certain, and life with term certain.
Life-Only Annuity Payments
Life-only payments continue as long as you live but stop immediately upon your death. Even if you live for forty or fifty years after you start receiving payments, the guaranteed payments will continue, provided the insurance company stays in business.
Every state has a system in place to protect policyholders if an insurance company goes out of business. Depending on the laws in your state, there may be a limit on how much you can be paid, though.
If you choose a life-only option, start receiving payments, and pass away one year later, the insurance does not return the rest of your principal to your heirs. You may have the option to purchase a principal refund option, but this costs more. It 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 payment than a joint-life term.
Typically for couples, joint-life annuity payments are structured similarly to 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 the surviving spouse to receive 50% or 75% of the benefit instead of 100%. 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 50% to continue to a surviving spouse.
If you're married and need to decide about how your pension benefits will pay out, be sure to study all of the pension survivor benefit options offered by your company. It will help you become familiar with the features, benefits, and drawbacks
Term Certain Annuity Payments
Also known as period certain, these annuity payouts are for a set term. 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 after the first payment.
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 ages 60 and 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 spouse passes first.
Life With Term Certain Payments
This option pays income for your lifetime or for a set period, whichever is last. For example, you might opt for life with a 10-year term. If you live for 20 years after you start payments, you receive income for that entire time. If you died two years after receiving payments, your beneficiary would receive payments for eight years to complete your 10-year term.
The Bottom Line
Any of these payout options can work. The best one for you depends on whether you have dependents, your age and health, and the other financial resources you have. While the life-only option has the highest payout, it might be worthwhile to have a lower payment and the security of knowing the payments may continue after your death.