Believe it or not, there are many ways to create a stream of income from your annuity. In Marketwatch’s “The 6 best ways to collect on your annuity,” Stan Haithcock tells us what he thinks are the best ways to annuitize. The first annuities, dating back hundreds of years, were immediate annuities that created an income stream after you made a lump sum payment. Most deferred annuities can also be annuitized now to create income that lasts for a certain time frame or for the rest of your life. Your income payments come from your principal and interest, so there are tax advantages when the money is outside of an IRA account. Lifetime income payments are based on your life expectancy and interest rates when you annuitize. You transfer your risk to the insurance company in hopes that you will live a long life and they will continue to pay you long after your principal has been depleted.
The first option for annuitization that Stan lists is life with installment refund. You will receive lifetime income payments until you die and any money leftover if you don’t live until your life expectancy will go to your beneficiary. This option gives you the highest lifetime income stream possible when you want the guarantee that you or your heirs will receive every penny of your money. The life with cash refund option is similar to the first option listed, but any remaining money goes to your heirs in the form of a lump sum rather than a continuation of your annuity payments. Choosing the installment refund makes your payments a little bit higher than choosing the cash refund because the insurance company keeps your money longer and doesn’t pay it out in a lump sum.
Life with period certain is another option when you want to create lifetime income. You will receive income for as long as you live just like with the first two options. You can add a period certain time frame so that your heirs will continue to receive payments if you die before that period is up. The most common time frames are 5 years, 10 years or 20 years. The longer the time frame guaranteed to pay your heirs, the lower your income payments will be. If your main goal with your annuity product is not to create lifetime income, you can opt for a period certain guarantee. You will continue to receive payments for as long as you choose in the contract, typically around 20 years. Five years is the shortest time frame for period certain guarantees and is often chosen by people who ladder their annuity purchases.
The life only guarantee is what most people think of when they hear the word annuitize, but it is far from being the only option available. Your payments are guaranteed for as long as you live, but no money will be paid to beneficiaries if you die before your life expectancy. This option is a good choice for those with no heirs or who have taken care of their beneficiaries with other investments. You receive the highest monthly income payments when you choose the life only guarantee. The final option listed in the article for annuitization is life with death benefits. You will receive lifetime income payments and your heirs will receive a pre-chosen percentage of your principal amount returned when you die. If you have a life with 50% death benefit rider on a $100,000 annuity, your heirs will receive $50,000 when you die. They will get this money even if you live far past your life expectancy, but this option costs the most.
Annuity products offer consistency like Social Security and pensions. Annuities are the only products you can buy that will guarantee you payments for as long as you live. Each annuity product comes with a cost, so you have to consider the value you will receive in exchange for that cost. If you want to create lifetime income from an annuity product, an expert at Annuity FYI can lead you in the right direction.