Printable checklist for your desk
Print this checklist and compare each payout option for the same premium.
Download the PDF (large print)The short version. When you turn an annuity into income, you choose how the payments are structured. Paying for your life only gives the highest payment but leaves nothing to heirs. Adding a spouse, a guaranteed period, or a refund lowers the payment in exchange for protection. After payments begin, the choice generally cannot be changed. [1, 2]
The main payout options
| Option | How it works | What to weigh |
|---|---|---|
| Life only (straight life) | Pays for the annuitant's lifetime and stops at death. | Gives the highest monthly amount per dollar of premium, and leaves nothing to a beneficiary. [2, 3] |
| Life with period certain | Pays for life, but for a minimum number of years (often 10, 15, or 20). If the annuitant dies early, a beneficiary receives the rest of the period. | Lower payment than life only, in exchange for a guarantee for heirs. [2, 3] |
| Life with refund (cash or installment) | If payments received are less than the premium, the difference goes to a beneficiary, either as cash or in installments. | Protects the amount you paid in. [2] |
| Joint and survivor | Continues until both people have died. The survivor may receive 100% or a reduced share, such as 50%, two-thirds, or 75%. | Often used for couples so the second person is not left without income. [2, 3, 4] |
| Period certain only | Pays for a fixed term, such as 5, 10, or 20 years, then stops. | Not lifetime income. Payments cease at the end of the term. [2] |
Option names vary by company. Ask for a written illustration of each choice side by side.
The NAIC lists the same four basic choices in plain terms: for your lifetime; the longer of your lifetime or your spouse's lifetime; a set period of time; or the longer of your lifetime or a set period. [1]
It is a one-way door
The NAIC states that after payments begin, you cannot take any other money out of the annuity, and you usually cannot change the payment amount. Depending on the option, survivors may receive nothing. Compare this with the flexibility you would give up. [1]
How the payments are taxed
Income payments are taxed as regular income, not as capital gains. If you bought the annuity with pre-tax money, the whole payment is generally taxable. If you bought it with after-tax money, each payment is split into a tax-free return of your cost and a taxable part. The IRS says the tax-free amount is figured at the annuity starting date and stays the same each year, up to your total cost. After that, payments are fully taxable. The simplified method is generally required for qualified plans, and the general rule applies to commercial annuities bought with after-tax money. If you die before recovering your full cost, the unrecovered amount may be an itemized deduction on your final return. [5, 6]
For the broader tax picture, see How Annuities Are Taxed.
Inflation and fixed payments
FINRA notes that fixed payments usually lack inflation adjustments, and that inflation protection is available but costs significantly more. A payment that looks adequate today can buy less over a long retirement. [7]
Questions to ask before choosing a payout
- What is the monthly payment for each option, side by side, for the same premium?
- What happens to the payments if I die in the first year? The tenth year?
- If my spouse outlives me, what share of the payment continues?
- Does the payment ever increase, and if so, what does that cost?
- Is any part of the premium or the payment available to me later?
- How will the payments be reported for tax, and what part is tax-free?
Frequently asked questions
What are the main income annuity payout options?
Life only, life with period certain, life with a cash or installment refund, joint and survivor, and period certain only. Option names vary by company.
Can I change the payout after payments begin?
The NAIC says that after payments begin you cannot take other money out of the annuity and you usually cannot change the payment amount.
How are income annuity payments taxed?
They are taxed as regular income. With after-tax money, each payment is split into a tax-free return of cost and a taxable part, figured at the annuity starting date.
Sources and review notes
- NAIC: Buyer's Guide to Fixed Deferred Annuities (payout choices; revised 2013)
- New York DFS: Annuity products (payout option definitions)
- Texas Department of Insurance: Annuities consumer guide
- California Department of Insurance: Senior annuities guide (2018)
- IRS Publication 575: Pension and Annuity Income
- IRS Publication 939: General Rule for Pensions and Annuities
- FINRA: Annuities
About this guide. This is general education, not tax, legal, or investment advice, and it is not a recommendation to buy or not buy any product. Nazim Lokhandwala is a licensed insurance professional who offers fixed and indexed annuity products. He does not offer variable annuities or registered index-linked annuities. This guide covers every type so you can compare, and an annuity is not the right choice for everyone. Annuity guarantees depend on the claims-paying ability of the issuing insurer. Product features, rates, and rules vary by company and by state, so read your contract and ask the seller to explain anything that is unclear.