An annuity is a legal arrangement involving the owner (also known as the annuitant) and an issuer (the insurance company). The contract owner makes the premium payment or payments to the insurance company and in exchange, the insurance company offers specific promises. These promises are specified in the contract and address a variety of components, including interest rates and types of scheduled withdrawals. The premium payments are typically made in one lump sum or a series of payments over specified series of time which is stipulated in the contract.

The purpose of an annuity is to provide the annuitant with a consistent stream of income during their retirement. Except for immediate annuities, most annuity contracts provide for tax-deferred account growth until the monies are withdrawn from the account.

What’s the Difference between an Immediate and Deferred Annuity?

Depending upon the kind of annuity you decide to purchase, you will either begin receiving regular income payments right away or at some point in time in the future. This distinction is what separates the two primary classifications of annuities which are immediate and deferred:

Immediate annuities – With an immediate annuity, which is called a single premium immediate annuity (SPIA), you the contract owner one payment (usually a one-time lump sum), and in exchange, you begin receiving income soon thereafter. The income payments begin typically no later than one year after the original single premium payment.

Deferred annuities – In contrast to the immediate annuity, a deferred annuity begins its payout many years after the initial premium payment. The deferred annuity has two separate parts or periods. Throughout the first period, also known as the accumulation period – the premiums you pay into your annuity, minus the appropriate charges or fees, will earn interest on a tax-deferred basis as long as the premiums paid in remain in the account.

With some types of annuities, there is a second period commonly called the payout period. During the course of the payout period, the insurer pays an income stream to the account holder or to a person they choose. Also known as the distribution period, in most cases, the annuitant has the option of choosing how they want to receive the annuity funds. Some examples include free withdrawals, annuitization, lifetime withdrawals, or a lump sum cash surrender.

What is a Joint and Survivor Annuity?

A joint and survivor annuity is an investment product that pays out regular payments as long as one of the annuitants listed in the contract is living. The joint and survivor annuity is required to have two or more annuitants which in most cases are married couples who commonly purchase them to guarantee the surviving spouse is provided with a regular source of income for the balance of his or her life. Annuities are typically utilized to furnish a consistent income stream during retirement.

Under the Hood of the Joint and Survivor Annuity

When issuing a joint and survivor annuity, insurance companies generally reduce the monthly income payments by a third or half for the surviving annuitant who will receive the income stream. For instance, Louise and David’s joint and survivor annuity will pay them $6,000 per month. When Louise passes away, David will receive $2,000 to $3,000 monthly. The terms and conditions of the annuity payout vary depending on the source of the funding and payment options chosen before the payments begin.

When you purchase an annuity from an insurance carrier, the insurer determines what income payout options they will provide, including the single or joint and survivor option. However, qualified plans which are employer-sponsored must designate the joint and survivor annuity the automatic option for married couples at the time of their retirement. An individual can receive a single-life annuity only if he or she obtains written approval from the primary annuitant’s present or previous spouse.

Guaranteed Payment of the Principal

If the annuity obtained through an insurance carrier has an installment refund option, the insurance company has to pay out an amount equal to the initial economic value of the annuity. If both of the annuitants pass away prior to the monthly payments having exceeded the principal, the monthly payments will continue being paid to the annuitants’ estate or to a designated beneficiary.

Additionally, if the annuity has a cash refund option, and both of the annuitants pass away before their monthly payments have exceeded the principal, the remainder of the principal is paid to the annuitants’ estate or to a designated beneficiary in a lump sum.

Annuity Payout Options

As soon as you have selected either a single life or a joint life annuity, you will need to determine whether you want to receive level payments or increasing payments. Compare these carefully to identify the options and features that best meet your needs.

Level Payments

If you select the level payments option, the amount of your monthly annuity payment remains the same year after year.

Increasing Payments

If you prefer the increasing payments option, the amount of the monthly payment can adjust annually on the anniversary date of the first payment. The amount of the adjustment will be based on the change in inflation, which is measured by the consumer price index.

The Increases in your monthly payout cannot go beyond 3% per year, and the amount of the monthly annuity payments can never decrease. Be mindful, however, that for this selection, when the annuity payments begin, they will be lower than they would have been if you had chosen the level payments option, but they can, however, potentially go up every year.

You are allowed to select increasing payments when you choose a single life or joint life annuity with a spouse. You cannot, however, elect increasing payments when the joint annuitant is not your spouse.

If you are looking to make conservative investments for your retirement planning, an annuity product should be at or near the top of your consideration. They are safe, they are guaranteed, and their various types to meet any retirement need.