Annuity Basics

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How Do Annuities Work?

A fixed annuity income remains steady, even if returns on other investments slump due to a changing economy, declining interest rates or falling stock prices. A variable annuity income can rise and fall with your chosen portfolio performance. You may earn higher returns, but those returns are not guaranteed. Although the value of a variable annuity may fluctuate in the accumulation phase, it can be annuitized — begin a series of payments — as a fixed annuity. Thus, the payment only varies if you select a variable payout.

There are two basic types of annuity payouts: immediate and deferred.

Contract Types

• Fixed immediate annuity — You put in a lump sum and your insurance company starts making regular, equal payments to you right away.



• Variable immediate annuity — You put in a lump sum and your insurance company begins making payments right away, but the amount of the payments will fluctuate based upon the return from the portfolio.



• Fixed deferred annuity — Your payments earn interest at a rate set by the insurance company with a guaranteed minimum annual rate of return until payout begins at a future date.



• Variable deferred annuity — Your options may include stock and bond funds offered by your insurance company. When payout begins, your account may be worth more or less than your initial investment, depending upon the performance of your portfolio.

Annuity Payout Options

• A lump-sum alternative, which allows you to withdraw the total amount of your annuity.



• An as-needed alternative, which allows you to withdraw the amount you need when needed.



• A systematic alternative, which allows you to withdraw a specified amount until your annuity is depleted. Under the systematic alternative, how much you receive — and for how many months you receive it — depends upon how much you have in your account and how much you are withdrawing each month.



• An annuitization alternative, under which you may receive either a life option where the income stream is guaranteed by the insurance company or period-certain option for a designated period — for example, for the rest of your life, as long as you or your spouse are alive, or a set period (such as 10 years). Common payout options include:



• The life option, which provides an income stream for life because they are calculated based upon the life of the annuitant only.



• The joint life option, which continues annuity payments to a spouse or another beneficiary upon the annuitant’s death. The monthly payment is lower than that of the life option because it is based on the life expectancy of both the annuitant and the beneficiary.



• The life with cash payment option, which provides regular payments for the lifetime of the annuitant, with any remaining balance paid to the beneficiary in a lump sum.



• The period certain option, under which the payments are made over a defined period of time, such as 10, 15 or 20 years.



• The life with guaranteed term option, which provides a lifetime income stream with payments guaranteed to continue for at least a specific term, such as 10 years. If the annuitant dies during this guaranteed period, the insurance company is required to continue payments to the estate or beneficiaries for the remainder of the guaranteed term.