Creating streams of regular income is one of the fundamental goals of retirement planning. After you stop working, you must gain periodic income from other sources in order to maintain the same standard of living you had before retirement. Annuities are a type of financial product where you pay an insurance company a lump sum or a series of payments, and in exchange it will pay you monthly income during retirement. Annuities can last for a fixed duration or until you die.
The duration of an annuity depends on the specific terms in the annuity contract. Similar to life insurance, you have the option of choosing annuities that pay out for different periods of time. For example, you could buy an annuity that lasts five, 10, 20 or even 30 years. Annuities that pay a guaranteed amount over a specific period of time are known as period certain annuities. If you happen to die before the end of the term, the remainder of the payments can go to a beneficiary such as a spouse or child.
Another option for annuities is to receive payments for the rest of your life. If you choose lifetime payments, your income payments can either be fixed or variable; fixed rate annuities pay a set amount, while variable rate annuities can pay different amounts based on the performance of underlying investments. When you die, your lifetime annuity ends -- nothing is left behind to a beneficiary. Lifetime annuities can be attractive options for younger retirees who may live longer than 30 years.
It is possible to purchase an annuity that covers both spouses until death. According to CNN, a joint or survivor annuity can be transferred to a beneficiary after you die and continue paying income until the beneficiary dies. In other words, you could cover yourself with the annuity and your spouse could take over the annuity if you die.
Some annuities include both a term and lifetime payment aspect. This type of annuity includes a certain term during which a beneficiary can receive payments in the event of death; after the term ends you continue receiving payments for life, but there is no survivor benefit. This type of annuity offers a way to provide income to a beneficiary in the event of unexpectedly early death, but also ensures that you keep receiving income payments if you live a long time.
- SEC: Annuities
- SEC: Variable Annuities: What You Should Know
- The Motley Fool: Annuities: What's to Like?
- CNN: Annuities - What payout options do I have?
- CNN: Annuities - What is an annuity?
- MassMutual. "Annuities: Understanding Surrender Charges." Accessed May 22, 2020.
- Texas Department of Insurance. "Understanding Annuities." Accessed May 22, 2020.
- Financial Industry Regulatory Authority (FINRA). "Indexed Annuities." Accessed May 22, 2020.
- Financial Industry Regulatory Authority (FINRA). "Variable Annuities." Accessed May 22, 2020.
- U.S. Securities & Exchange Commission. "Annuities." Accessed May 22, 2020.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.