Have you ever been confused about the terminology around annuity income payout options? You’re not alone. There are several options available, and today, we’re going to simplify things. Understanding these payout options can help you make smarter decisions for your retirement.
Annuity income payout options determine how and when you’ll receive income. This can be critical to securing your financial future, so let’s dive in and break it down.
Understanding Lifetime Income Rider (LIR) and Guaranteed Minimum Benefit (GMWB)
When you’re looking at fixed index annuities or variable annuities, you’ll often find one of two options attached to them if they come with an income rider:
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- LIR (Lifetime Income Rider)
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- GMWB (Guaranteed Minimum Benefit)
These terms describe the annual guaranteed payout you’ll receive every year from the annuity. They all mean basically the same thing: a steady, predictable income. Things get a bit more confusing when we talk about SPIA products, so let’s move on to those.
Single Premium Immediate Annuities (SPIAs) Explained
SPIA stands for Single Premium Immediate Annuity. This is where most people start to feel a little lost, but don’t worry—here’s a quick explanation. SPIAs provide guaranteed income right away after you pay a lump sum.
There are several payout options with SPIAs that determine how much you’ll get and how long the income will last. Let’s break these down:
Life Only Option: Higher Income, No Death Benefit
One option is called life only. This means you (or you and your spouse) will receive guaranteed income for life. The downside is, if something happens to you early on, there’s no death benefit—meaning the insurance company keeps the remaining money.
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- Pros: Higher income
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- Cons: No money left for your beneficiaries
This used to be the only option, and that’s why annuities sometimes get a bad reputation. Most people don’t want to work hard their whole life, only to pass away and leave nothing behind for their loved ones.
Life with Return of Premium (ROP): Guarantee for Beneficiaries
Another option is life with return of premium (ROP). This option guarantees a lifetime income for you (or you and your spouse) and ensures that your beneficiaries receive any money that wasn’t paid out if you pass away early.
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- Example:
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- Initial premium: $100,000
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- Annual income: $10,000
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- If you pass away after 5 years, your beneficiaries would receive the remaining $50,000.
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- Example:
This is a good option if you want to make sure your loved ones get something back.
Life with Installment Refund: Monthly Continuation for Beneficiaries
Similar to the ROP option, the life with installment refund guarantees your beneficiaries continue receiving the monthly payments after you pass, until the original premium is paid back.
This means instead of a lump sum, your beneficiaries will continue getting the same payments you were receiving. It’s a more gradual way to leave something behind.
Life with Term Certain: Combining Lifetime and Time-Specific Payouts
Another option is life with term certain. This is a combination of lifetime income with a guaranteed payout for a specific number of years—like 10, 20, or even 30 years.
Here’s how it works:
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- You choose a term (e.g., 10 years).
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- If you pass away after 5 years, your beneficiaries will still receive payments for the remaining 5 years.
This table shows the differences between the various payout options:
| Option | Income | Death Benefit |
| Life Only | Highest | None |
| Life with ROP | Lower than Life Only | Lump sum of remaining premium |
| Life with Installment Refund | Lower than Life Only | Continued monthly payments |
| Life with Term Certain | Depends on term chosen | Guaranteed for chosen term |
The longer the term, the lower the payment. But if you want more security, this might be a good choice for you.
Which Annuity Option Pays the Most?
Now, you might be wondering: which one of these options pays the most? The answer depends on several factors, like your age and the current economic climate. In my experience, a fixed indexed annuity with an income rider or a SPIA with a shorter term certain usually offers the highest payouts.
Sometimes, the best option could even be a combination of two annuity types. It all depends on your personal situation and what you’re trying to achieve with your money.
Customizing Your Annuity Strategy with Atlas Financial
The most important question you should ask yourself is, “What is the purpose of my money?” Do you want guaranteed income, or are you more focused on leaving something behind for your loved ones? Once you answer that, we can choose the best annuity option for you.
For example:
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- If income is your goal, we’ll look for the highest payout option (probably not life only, since it doesn’t leave anything behind).
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- If leaving a legacy is important, we’ll choose an option that provides both income and a death benefit, like life with ROP.
It’s all about making sure your money works for you, in the way you want it to.
Conclusion: Wrapping Up Annuity Income Payout Options
We’ve covered a lot of ground today, from LIRs and GMWBs to SPIAs and the different payout options available. Remember, these decisions are all about what you want to achieve with your money. There’s no one-size-fits-all solution.
The key is to stay informed and make decisions that help secure your financial future. If you want more details, make sure to explore further resources or speak with a financial professional who can help tailor a strategy for you.
Podcast Episode 44: Introduction to Annuity Income Payout Options
Download Episode 44: Introduction to Annuity Income Payout Options on Apple Podcast