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Annuities > Payout

Annuities provide you with a lifetime income that you can never outlive. The payout process works the same for fixed, variable, or immediate annuities.

When you're ready to annuitize, the actuaries at your insurance company start calculating your payout. It depends on a number of factors.

First, they determine how much longer you are expected to live by consulting life expectancy tables. A 70-year-old can expect to receive lower monthly payments than an 80-year-old for the same investment. The more time you're expected to live, the more monthly payments are expected to be made.

Then they look at the expected rate of return on the money you're paying them, usually a conservative estimate, since they are taking on all of the investment risk. Often, people do not want to depend on the insurance company's expertise with investing, and so choose to go with a variable annuity, one tied directly on the performance of the investments made, which passes the risk of investing on to you. Your monthly payments will rise and fall according to shifts in the market.

Your sex will also be a factor in determining payments. Women are expected to live longer than men, and so their monthly payments will be lower than men of the same age.

You can opt for a plan with a payment certain period. For example, if you have a ten-year payment certain period, your beneficiary will continue receiving annuity payments to the ten-year mark if you die within the ten-year period. Your payment for a plan like this will be lower than a regular payment. This is because you're changing the interval of time that you'll remain alive. If it was another 0-15 years before, now it is 10-15, so the insurance company risks more payments on average for a number of people with a ten-year payment certain contract.

You can also pass on your annuity payments to your spouse after your death. The payments will be lowered further with such an option, because now the insurance company needs to calculate how long at least one of you will remain alive, a more complicated calculation than just for one individual.

Insurance companies insure many people with annuity contracts. While one person may live to be 110, another may die at 62, so the company will lose money on the one living longer, but reap huge benefits when the other dies early. Payouts are calculated so that, on average, the insurance company will come out even.