Regardless of whether you have a fixed annuity, a variable annuity, or an equity indexed annuity, the best part of saving is when you start seeing the benefits of all your hard work. The accumulation phase is where the hard work comes, but after you annuitize your contract, you will start getting monthly distributions.
When it comes time for the distribution stage, your earnings will be taxed on a last in, first out basis. An annuity’s interest is the first thing that will be withdrawn, so your first distributions will be taxed more heavily than later distributions will be. This is standard for all annuities purchased after 1982. This is where the similarities in distribution methods end. There are many different ways to get distributions from your annuity contract, thus helping you to further personalize the annuity you have bought and put it to the best use possible.
Straight life is the most basic option. This distribution will give you a set distribution amount that you will receive each month for the rest of your life. This is valid regardless of whether you live one month after the annuitization period begins, or if you live for another forty years. If you are worried about outliving your money, this option is your best bet. Once you pass away, the remaining money belongs to the insurance company—even if you have only received a single payment.
Obviously, when you are talking about a married couple, a straight life policy isn’t exactly the best distribution choice. Insurance companies have created joint and survivor distribution options. While the payout for these is generally lower per month than a straight life distribution would be, after the primary owner on the account passes away, the surviving spouse will continue to receive distributions.
There are a few sub-choices available with a joint and survivor method. The spouse can receive up to 100 percent of the distributions if they choose for the remainder of their lives. Or, if you want larger payouts in the beginning of the distribution phase, you can choose the joint and survivor plan with a lower percentage paid out after the primary owner of the annuity dies. For example, you might choose a 75 percent joint and survivor account. This would give you larger payouts while both spouses are alive and 75 percent of the original distribution amount will be given to the surviving spouse after the primary owner passes away. The 75 percent payout in this example would go to the survivor for the rest of their lives.
Period certain is one distribution variation that many people choose. This is pretty simple in nature. You select a time frame, and your investment—plus any gains—will be returned to you over that set period of time. You can choose a twenty year period certain, for example, and the insurance company will determine just how much interest you would earn over that time and will then calculate how much to return to you each month so that you see a consistent amount on your distribution check each month for twenty years.
Life with period certain is another option. With this, you can leave some of your money behind after you die. You need to select a period of time which you want your annuity distributions to continue after your death. This can range from five years up to twenty. The longer the period certain, the smaller your distribution size will be.
Many insurance companies are now offering flexible distributions as well. This is a cutting edge new take on the rigid nature of annuity distributions. With this you have much greater control over your money. You can select a set amount that you would like to receive and a set amount of time for how long you would like to receive it. If there is money left over after the amortization is calculated, you have will have open access to that remainder of your investment.