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Here’s how to buy an income annuity, the details about how these annuities work, and a summary of the income options.
You buy an income annuity, technically called an immediate annuity or an income annuity, from an insurance company with a one-time lump sum payment. In exchange for your premium, the insurance company promises to send you a check every month for as long as you live or for the period you select. You can set the starting date for your payments to begin within one month to a year.
You can buy an income annuity using money you’ve saved in a taxable account. Or you can buy a qualified annuity with money you roll over or transfer from your IRA, 401(k), 403(b), 457 governmental plan, or other employer-sponsored retirement plan.
With a lifetime annuity contract an insurance company promises to make regular payments to you for as long as you live, even if your payments end up exceeding the savings you used to buy the annuity and its earnings.
Here’s how a lifetime annuity works: The insurance company pools your purchase payment with other contract holders who have similar probabilities of living to a certain age. If you live beyond your life expectancy, the insurance company will continue to pay you from the pool of money left by those who died sooner than expected.
Consequently, the insurance company will end up paying you more than you paid to buy the annuity. The longer you live, the larger this so-called mortality or survivorship return.
When you buy an income annuity you generally have six to eight options for receiving income. The specifics of each option vary by contract and the one you choose affects the amount of your payments.
You can choose to receive income for the rest of your life, or for both your life and the life of a joint annuitant, who can be your spouse or someone who isn’t related to you. As an alternative to lifetime income, you can choose to receive payments only for a set period or for a set dollar amount.
Importantly, to avoid forfeiting your savings in the event you or any joint annuitant die soon after you sign a contract, you can add a guaranteed period. With this option, if you and your joint annuitant die before the end of the guaranteed period, payments continue to your beneficiary until the end of the guaranteed period.
You can choose between a fixed income annuity, which has payments that either remain the same or are increased for inflation, or a variable income annuity, which has payments that go up or down depending on the performance of the investment options you select.
Or you can opt for an annuity that provides a combination of fixed and variable payments, or buy both a fixed annuity and a variable annuity separately. You can receive your payments monthly, quarterly, semi-annually, or annually.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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