Lesson in Indexed Annuities Part 5

Part 1

Part 2

Part 3

Part 4

In our last blog article, we covered indexing methods in detail, focusing on three of the most common ways that insurance companies calculate the way interest is credited to the annuity account. We also touched on contract riders and how they can provide increased flexibility to the account holder.

Today, we’ll talk about the income phase of indexed annuities. Remember from our first installment that there are two distinct phases in the lifetime of an indexed annuity: the accumulation phase and the income phase. The income phase is when the assets accumulated over the term of the annuity account are converted into regular income payments to the account owner. There are a number of options available to the account holder as to how these payments are made.

The Income Phase

When you are an indexed annuity account owner, you have options when it is time to convert your hard-earned assets into regular income payments. Typically, the income phase of indexed annuity kicks in when you are at or very close to retirement age – these payments help to cover any expenses you might have when you’re no longer employed. There are several options for receiving income from an indexed annuity, including:

  • Annuitization – in this option, the value of your indexed annuity is converted into a stream of regular payments for a specified period of time. Another option within this method is converting assets into a lifetime income arrangement. Your financial adviser can provide more details about this option and some of the features of the different methods encompassed by this option.

  • Systematic Withdrawals – for this income option, a plan is set up to provide regular payments over a period of time until all of the assets have been withdrawn from the account. For example, an account owner can opt to receive $1500 each month until the assets in the account are exhausted. To provide increased flexibility, the amount of the withdrawal and the payment schedule itself can be adjusted. One drawback to this option is that the early withdrawals from the account are taxed as ordinary income since it is the earnings being withdrawn before the principal. Also, it is possible that the account holder will outlive his or her retirement income; speak to your retirement planner about other savings options to help cover this possibility.

  • Lump Sum Distribution – in this option, the account holder surrenders his or her account and receives one lump sum payment. Of course, this option also requires income tax to be paid; any earnings received from the lump sum payment require tax to be paid in the year they were received by the account holder. And, as with the systematic withdrawal, it is entirely possible to outlive the retirement savings you’ve set aside using an indexed annuity.

Even More Income Options

There are other income-distribution options available other than the three described above. As with any retirement account, it is critical that you speak to your retirement planner to determine which option is right for your financial needs and your goals. Let’s explore some of these other income-stream options, which include:

  • Life Income with Refund Guarantee Option – in this option, payments are made to the account holder for as long as he or she is alive. If the account holder should die before all payments have been received, or if a pre-set percentage of the annuity’s purchase price has not be reached, the account holder’s beneficiary receives the balance of the account payments up to the refund guarantee amount (specified in the annuity contract).
  • Life Income Option – for this income-streaming option, payments are made for as long as the account holder is alive. These payments stop at the account owner’s death; there is no provision for assigning a beneficiary to continue receiving payments. This option provides the maximum lifetime income, up to the guarantee contained in the account contract.
  • Life Income with Period Certain Option – as with other options, payments continue to be made as long as the account holder is alive. If the account holder should die before a specified number of regular payments has been reached (say, for example, 90 monthly payments), the remaining payments in the period certain (another way of saying the guaranteed period as specified in the annuity contract) go to the named beneficiary.
  • Joint-and-Survivor Option – in this option, the payout of income covers two lives, such as a husband-and-wife pair who are joint owners of the annuity account. Payments continue as long as either of the two account owners are alive. To add flexibility to this option, if one of the account holders should die, the remaining payments can be structured to reduce the amounts to a certain percentage of the payment amount received when both account owners were alive. Typically, this option also includes a “period certain” feature, which is a guaranteed income payment timeframe.
  • Period Certain Option – payments in this option are structured to occur over a specified period of time, such as over 15 or 20 years. The payments stop when the period certain is reached. If the account holder should die before the period certain is reached, the beneficiary of the account will receive the remaining payments.

As with all other options and features of indexed annuities, guarantees are based on the issuing insurance company’s ability to pay any claims. Your licensed financial adviser can give you more details on other income options and contract features available in indexed annuities and can help steer you toward stable companies and plans to help ensure uninterrupted income for your retirement purposes.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s