When you receive income from an immediate annuity, or from a pension that pays benefits in the form of an annuity, you must choose the term of the payments. Below are the three most common choices.
Life-Only Annuity Payments
Life-only payments continue as long as you live, but stop immediately upon your death. Even if you live forty or fifty years the guaranteed payments will continue, provided the insurance company stays in business.Caution: If you choose a life-only option, and pass away one year later, the insurance company does not return the rest of your principal to your heirs. This 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 stream than a joint life term.
Joint Life Annuity Payments
Typically for couples; joint life annuity payments are structured in a similar manner as 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, joint life annuity payments insure that income will continue to a surviving spouse.
Many pension plans offer a variation of joint life payments, which allow you to continue 50% of the benefit, or 75% of the benefit to a surviving spouse, instead of 100% of the benefit. 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 only 50% to continue to a surviving spouse.
Term Certain Annuity Payments
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 from the first payment had passed.
After the initial ten years, payments stop. Term certain annuities can be a good way to provide income in situations where you have 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 age 60 and age 65.
