How Do Annuities Pay You? Complete Guide to Payout Options in 2025
Understand all the ways you can receive income from your annuity with real payment examples
🌰 In a Nutshell
Annuities offer multiple payout methods:
- Lifetime Income: Monthly payments for as long as you live (most popular)
- Period Certain: Payments for a set number of years (10, 15, 20 years)
- Joint Life: Continues payments to your spouse after you die
- Lump Sum Withdrawals: Take out chunks of money when needed (deferred only)
- Most common choice: "Life with 10 Year Certain" — pays for life but guarantees at least 10 years of payments
The 5 Main Ways Annuities Pay You
When you're ready to receive income, you choose from these payout options. Each has different payment amounts and protection levels.
1. Life Only (Single Life)
Pays you income for your entire life, but stops immediately when you die.
Pros
- Highest payment
- Simple to understand
Cons
- No death benefit
- Risk if you die early
2. Life with Period Certain
Pays for life, but guarantees a minimum number of years. If you die early, beneficiary gets remaining payments.
Pros
- High payment
- Protects heirs
- Guaranteed minimum
Cons
- Slightly lower than Life Only
Example
You choose Life with 10 Year Certain. You receive payments for 5 years, then die. Your beneficiary receives the remaining 5 years of payments (60 months × $620 = $37,200).
3. Joint Life (Joint & Survivor)
Pays income for your life and continues to your spouse after you die (at 100% or 50% of original amount).
Pros
- Protects spouse
- Income continues
- Peace of mind
Cons
- Lower initial payment
- Stops when both die
4. Period Certain Only (No Life)
Pays a fixed amount for a set number of years (10, 15, 20), then stops—even if you're still alive.
Pros
- Higher payments
- Guaranteed to heirs
- Predictable end date
Cons
- Payments stop
- Risk if you outlive it
5. Cash Refund (or Installment Refund)
Pays for life, but if you die before receiving your full premium back, beneficiary gets the remaining balance.
Pros
- Lifetime income
- Protects premium
- Peace of mind
Cons
- Lower than Life Only
- Complex calculations
Example
You deposit $100,000 and receive $600/month. After 8 years, you've received $57,600 and then die. Your beneficiary receives the remaining $42,400 ($100,000 - $57,600) as a lump sum.
Which Payout Option Is Right for You?
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Monthly Payment Comparison by Age
Here's how much a $100,000 annuity pays per month based on age and payout option. Rates shown are for males; females receive slightly lower payments due to longer life expectancy.
| Age | Life Only | Life with 10-Yr Certain | Joint Life (100%) | Cash Refund |
|---|---|---|---|---|
| 60 | $550/mo | $520/mo | $480/mo | $510/mo |
| 65 | $650/mo | $620/mo | $560/mo | $600/mo |
| 70 | $750/mo | $720/mo | $650/mo | $700/mo |
| 75 | $880/mo | $840/mo | $750/mo | $820/mo |
| 80 | $1,050/mo | $1,000/mo | $880/mo | $980/mo |
💡 Why Payments Increase with Age
Older buyers receive higher monthly payments because they have fewer expected years to receive income. An 80-year-old gets nearly double the monthly payment of a 60-year-old for the same premium.
⚠️ Rates Change Based on Interest Rates
These are example rates. Actual payments depend on current interest rates and the specific insurance company. When interest rates are high, annuity payments increase. Always get current quotes.
Deferred Annuity: Withdrawal Options During Accumulation
Before you annuitize (turn on lifetime income), deferred annuities offer flexible withdrawal options:
Free Withdrawal Provision (10% Per Year)
Most annuities let you withdraw up to 10% of your account value annually without surrender charges. Perfect for emergency needs.
Example: $200,000 account value = can withdraw $20,000/year penalty-free
Systematic Withdrawals
Set up automatic monthly or quarterly withdrawals (like a paycheck) without annuitizing. You keep access to your principal.
Full Surrender (Cash Out)
Close the annuity and take all your money as a lump sum. Beware: Surrender charges apply for 5-10 years (typically 7-10% penalty in early years).
Required Minimum Distributions (RMDs)
If your annuity is inside an IRA, you must take RMDs starting at age 73 (as of 2025). The IRS calculates the required amount based on your age.
Income Riders: The Best of Both Worlds
Many modern deferred annuities offer income riders that provide guaranteed lifetime income WITHOUT giving up access to your principal.
✓ Traditional Annuitization
- Turn balance into lifetime income
- Give up access to lump sum
- Higher monthly payments
- Cannot change decision
- Death benefit depends on option chosen
🏆 Income Rider (GLWB)
- Guaranteed lifetime withdrawals
- Keep access to remaining balance
- Slightly lower monthly payments
- Can adjust or stop anytime
- Remaining balance goes to heirs
💡 GLWB = Guaranteed Lifetime Withdrawal Benefit
This rider costs 0.5-1.5% annually but gives you flexibility. You can take guaranteed income for life, and if you die, your heirs inherit any remaining account balance—offering both income AND a death benefit.
Real Example: Meet Patricia, Age 67
Patricia's Situation
Patricia just retired with $250,000 from her 401(k). She's single, but wants to leave something to her grandchildren. She needs $1,500/month income to supplement Social Security.
Option 1: Life Only
Payment: $1,625/mo — Highest income, but nothing goes to grandkids if she dies early. Too risky for her goals.
Option 2: Life with 10-Year Certain
Payment: $1,550/mo — Great income, and if she dies within 10 years, grandkids get remaining payments. Slightly less than Life Only but offers protection.
Option 3: Cash Refund
Payment: $1,500/mo — Meets her income need, and guarantees her grandkids will get at least $250,000 total (either through payments to her or refund to them).
✓ Patricia's Choice: Cash Refund
She chose Cash Refund because it meets her $1,500/month income goal AND guarantees her grandchildren will receive the full $250,000 premium (either through her receiving payments or them receiving the balance). This gives her peace of mind that her legacy is protected.
What Happens to Annuity Payments When You Die?
This depends entirely on the payout option you selected:
| Payout Option | What Happens at Death | Beneficiary Receives |
|---|---|---|
| Life Only | Payments stop immediately | Nothing |
| Life with 10-Year Certain | If you die before 10 years, payments continue to beneficiary | Remaining guaranteed payments |
| Joint Life (100%) | Payments continue to spouse at same amount | 100% of monthly payment (lifetime) |
| Joint Life (50%) | Payments continue to spouse at half amount | 50% of monthly payment (lifetime) |
| Cash Refund | Beneficiary receives remaining premium not yet paid out | Lump sum = Premium minus payments received |
| Period Certain Only | Payments continue for remaining period | Remaining monthly payments (or lump sum) |
How Are Annuity Payments Taxed?
Non-Qualified Annuity
(Purchased with after-tax money)
- Part of each payment is tax-free return of principal
- Part is taxable earnings
- Called the "exclusion ratio"
- Example: $1,000 payment might be $700 taxable, $300 tax-free
Qualified Annuity
(Inside IRA or 401k)
- 100% of each payment is taxable as ordinary income
- No exclusion ratio
- Subject to RMDs starting age 73
- Example: $1,000 payment = $1,000 taxable income
⚠️ Tax Penalty Before Age 59½
If you take withdrawals before age 59½, you'll owe ordinary income tax PLUS a 10% IRS early withdrawal penalty on the gains portion. Exceptions exist for disability, death, and certain structured payments.
How to Choose the Right Payout Option
Are you married?
Yes: Consider Joint Life to protect your spouse
No: Life Only or Life with Period Certain
Do you want to leave an inheritance?
Yes: Choose Period Certain, Cash Refund, or Income Rider with death benefit
No: Life Only gives you the highest payment
How's your health?
Poor health/short life expectancy: Period Certain Only or Cash Refund protects your investment
Excellent health/long family lifespan: Life Only maximizes income
Do you need maximum monthly income?
Yes: Life Only pays the most
No: Add protection with Period Certain or Cash Refund
Do you want flexibility to access principal?
Yes: Choose Income Rider (GLWB) instead of annuitizing
No: Traditional annuitization offers higher payments
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