There are two annuity payout options: the annuitant may choose a pre-determined number of benefit payments or an indefinite number of lifetime payments. The latter is typically more expensive because it pays out higher amounts to compensate for the policy owner’s uncertainty about how long they will live but leaves money on the table if they die early.
Which annuity payout option allows the policy owner to choose a pre-determined number of benefit payments?
The period of certain payout guarantees payments for a specific number of years, typically 5 to 20 years. The payments can be passed to a beneficiary if the annuitant dies before the policy ends.
Pros Of Receiving Pre-Determined Payments
- You can set the payment schedule. You will know how many payments you and your beneficiary will receive and how much they will be worth.
- The payments will be larger than payments from a straight-life annuity.
Cons Of Receiving Pre-Determined Payments
- If you live beyond a certain period, the annuity payments stop.
- Pre-determined payments can be less than the original investment.
- The payout earns little to no interest.
- Owners give up control over their money to the insurance company.
An Alternative To Pre-Determined Payments
Essentially pre-determined payments are paying the annuity owner back their money over a fixed period, with a little bit of interest, around one percent. So instead of giving up control over your savings to the insurance company, do this instead:
- Purchase a deferred annuity that allows an immediate penalty-free withdrawal based on the original investment amount (not the account value).
- Instead of a 10-year certain annuity, withdraw 10% each year for ten years. At the end of the tenth year, you’ll have more interest to withdraw in a lump sum than any period certain could provide.
- Instead of a 20-year certain annuity, withdraw 5% each year for twenty years. At the end of the tenth year, you’ll have more interest to collect in a lump sum than any period certain could provide.
Helpful Tip: payment annuity calculator
Next Steps
Ultimately, it is up to the annuitant to decide which type of annuity payout option is best for them. They must consider their anticipated longevity, need for an immediate income stream, and the trade-offs associated with both options. If they choose a guaranteed payment period, they will be sure to always receive an income without worrying about it ending too soon. On the other hand, if the annuitant wants more flexibility and assurances that the money or assets won’t run out after a specific time frame, then a lifetime payment plan could be advantageous. Ultimately, everyone’s situation is unique, and understanding all the nuances associated with an annuity policy can help determine their ideal payout structure.
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