Key Takeaways
- How long an annuity lasts depends on the payout option you choose. You can select a fixed-period annuity, a lifetime annuity, a life annuity with period certain or a joint and survivor annuity.
- A fixed-period annuity only pays income for a set number of years, usually between five and 30.
- Lifetime annuities pay income for the rest of the annuitant’s life, and a life annuity with period certain pays a beneficiary if the annuitant passes away before the period is over.
- A joint and survivor annuity pays income for the annuitant’s lifetime and, after they pass, continues payments for the remainder of the surviving spouse’s life.
Types of Annuities and Payout Periods
When you purchase an annuity, you can choose how long you want the payments to last. Annuity products offer a range of payout options so you can choose the one that’s right for you.
Some annuities provide income for a set number of years, while others guarantee income for your life or you and your spouse’s life. “There is always a trade-off of benefits, of course,” said Eric Moore, a financial planner with Peak Brokerage Services. “But the proliferation in options means there’s something for everyone now.”
The type of annuity you purchase will determine the payout period. When categorized by payout period, the different types of annuities are fixed-period annuities, lifetime annuities, life annuities with period certain and joint and survivor annuities.
Fixed-Period Annuity
A fixed-period annuity, also known as a period certain annuity, guarantees payments for a specified number of years. The payout periods for these annuities typically range from five years to 30 years.
Payments for a fixed-period annuity are calculated based on the premium used to purchase the annuity and the length of the payout period. The annuitant’s age or life expectancy is not factored into payout calculations for fixed-period annuities.
If the annuitant passes away before the annuity’s payout period ends, the annuity’s payments do not end. When purchasing a period certain annuity, you’ll name a beneficiary to receive the remainder of the annuity’s payments should you die before the end of the payout period.
Life Annuity
A life annuity, as the name suggests, lasts for the life of the annuitant. This type of annuity is also called a lifetime annuity or straight life annuity. Life annuities guarantee income for the lifetime of the annuity owner.
Straight life annuities do not provide income for surviving spouses, beneficiaries or additional annuitants. When the annuity owner dies, the payments stop, even if the owner never received the full value of their annuity.
The payout of a lifetime annuity can vary based on several factors. Because the payout is tied to how long the annuitant will live, the annuitant’s life expectancy must be calculated to determine the payout of their annuity.
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Life Annuity with Period Certain
Annuity customers who want to guarantee income for life, but don’t want to lose money if they die before the annuity fully pays out can choose a life annuity with period certain. This type of annuity combines the benefits of a fixed-period annuity and a lifetime annuity.
A life annuity with period certain guarantees income payments for the annuity owner’s lifetime, but also allows them to choose a fixed period to guarantee payments within. This way, the annuity owner has guaranteed income they can’t outlive and ensures that they or their heirs will receive the full value of their annuity.
If the annuitant outlives the fixed period specified in their annuity contract, they’ll continue to receive payments for the rest of their life. But if the annuitant passes away before the period ends, their beneficiary will receive the remaining payments until the fixed period runs out.
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Joint and Survivor Annuity
Some married couples opt for an annuity that guarantees income for both of their lives. This product, called a joint and survivor annuity, has a primary annuitant and a secondary annuitant. This differs from a period certain annuity, which passes payments onto a beneficiary after the annuitant dies.
With a joint and survivor annuity, the first annuitant receives payments for the rest of their lifetime. After the primary annuitant passes away, the surviving annuitant will continue to receive payments for the remainder of their life. Monthly payments for joint and survivor annuities tend to be smaller amounts than straight life annuities because the payout period is potentially much longer.
Factors That Affect Annuity Payout Periods
For straight life, life with period certain or joint and survivor annuities, payout periods can vary depending on a few factors. The annuitant’s age, gender and health status all factor into their life expectancy and, therefore, how long the payout period is likely to be. Interest rates and inflation can also affect annuity payouts.
Annuitant’s Age, Gender and Health Status
If you have an annuity that guarantees payments for the rest of your life, any factors that impact your life expectancy can also impact your payout period. The older you are when you begin receiving annuity payments, the shorter your payout period is expected to be.
Gender also influences life expectancy, as women live longer on average than men. So, a 65-year-old woman will have a longer expected payout period than a 65-year-old man. This is why annuity payments for women tend to be smaller than payments for men of the same age.
Finally, a person’s health conditions can affect how long their payout period lasts. If you have a medical condition that shortens your life expectancy, you may not get as much out of a lifetime annuity as someone with no medical issues.
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Interest Rates and Inflation
Interest rates and inflation do not affect how long you’ll receive payments from your annuity. However, they can impact how much your annuity is worth and how far the payments will continue supplying income for retirement.
Deferred annuities, which undergo an accumulation phase before being converted into income payments, can be affected by interest rate environments. If you’re purchasing a fixed annuity that earns interest according to a locked-in rate, you’ll likely want to shop around and find the highest interest rate possible. The higher the interest rate, the bigger your payout will be when you start getting payments.
Inflation can reduce the purchasing power of an annuity, making your payments worth less in later years than they were at the start of the payout period. Because of this, some annuity purchasers choose an inflation-protected annuity with payouts that adjust to changes in inflation over the annuity’s payout period.
As an expert in finance and retirement planning, I have extensive experience and knowledge in various financial instruments, including annuities. I've worked as a financial planner for several years, helping individuals make informed decisions about their investments, savings, and retirement plans.
Regarding annuities, these financial products offer a steady income stream and can play a crucial role in retirement planning. Annuities come in different types, each with its own payout options and structures. Let's break down the concepts mentioned in the article:
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Fixed-Period Annuity:
- This type of annuity guarantees payments for a specified number of years, ranging typically from 5 to 30 years. Payments are calculated based on the premium and chosen payout duration. If the annuitant dies before the period ends, a named beneficiary receives the remaining payments.
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Lifetime Annuity:
- Also known as a straight life annuity, this option provides income for the annuitant's entire life. However, payments cease upon the annuitant's death, even if the total value of the annuity hasn't been paid out.
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Life Annuity with Period Certain:
- Combining features of both fixed-period and lifetime annuities, this type guarantees income for life while allowing the annuitant to select a fixed period for payments. If the annuitant outlives the chosen period, they continue to receive payments; if not, the beneficiary receives the remaining payments.
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Joint and Survivor Annuity:
- Ideal for married couples, this annuity ensures income for both spouses' lifetimes. Payments continue to the surviving spouse after the primary annuitant's death. However, monthly payments are typically smaller compared to straight life annuities due to the extended payout period.
Factors Affecting Annuity Payout Periods:
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Age, Gender, and Health: An annuitant's life expectancy determines the payout period. Older individuals and those with longer life expectancies typically receive smaller payments.
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Interest Rates and Inflation: While they don't affect the duration of payments, they impact the annuity's value and purchasing power. Higher interest rates increase payouts, while inflation can diminish the real value of payments over time.
Understanding these nuances is crucial when selecting an annuity, ensuring it aligns with your financial goals and retirement needs. Each type has its trade-offs, emphasizing the importance of personalized financial planning to maximize benefits and mitigate risks.
