When choosing an annuity, buyers select a guaranteed length of time to receive benefit payments (e.g. monthly, annually) in exchange for surrendering the annuity. When a deferred annuity matures, the value can be taken in a lump-sum or applied to one of the annuity distribution options (annuitized) described below.
- Lump-Sum Distributions: If the annuitant surrenders the contract and receives a lump-sum distribution, any gain over the annuity principal is taxed as ordinary income in the year received.
Some insurers offer annuity owners only a few annuitization choices, but other annuity contracts and retirement plans offer several options, including:
- Single Life Annuity: Payments are received for the owner's full life expectancy; the younger the owner, the lower the periodic payments. If the owner dies before his or her life expectancy, the insurer keeps the balance. If the owner outlives his or her life expectancy, payments continue. The advantage of a life annuity is that it generates a higher payment amount than some other options (e.g., joint life annuity). The disadvantage of a life annuity is that, if you die prematurely, you only receive only a small amount of the annuity's cash accumulations, which cannot be passed along to the surviving family.
