How annuities send you money
An annuity pays you in one of four main ways: a lump sum all at once, regular monthly or annual payments for a set number of years, regular payments for the rest of your life, or a combination that does both. Which payout method you get depends on the type of annuity you bought and the choices you made when you purchased it. The insurance company that holds your annuity handles all the payments directly — they send checks, set up bank transfers, or arrange direct deposit to your account.
The payout method matters because it changes how much money you receive and how long it lasts. Some methods give you more total money over time but in smaller chunks. Others give you everything at once but you have to manage it yourself. Understanding each option helps you see which one fits your situation.
Key Takeaways
- Lump sum payouts give you all your money at once, which you then manage on your own.
- Period-certain annuities pay you a fixed amount each month for a number of years you choose, such as 10 or 20 years.
- Life annuities pay you monthly or annually for as long as you live, no matter how long that is.
- Joint and survivor annuities continue paying your spouse or beneficiary after you die, though usually at a lower monthly amount.
- You choose your payout method when you buy the annuity, and most choices cannot be changed later.
Lump sum: taking all your money at once
A lump sum payout means the insurance company sends you the entire value of your annuity in a single payment. This typically happens within 30 to 60 days after you request it, though the exact timing depends on your contract and the insurance company's procedures. Once you receive the money, it is yours to spend, invest, or save however you choose.
The trade-off is that you lose the insurance company's may provide of regular income. If you spend the lump sum quickly or make poor investment choices, the money can run out. You also may owe income taxes on the entire amount in the year you receive it, which could push you into a higher tax bracket. Some annuities do not offer a lump sum option at all, so check your contract before assuming you can take this route.
Period-certain annuities: payments for a fixed number of years
A period-certain annuity pays you a set amount — usually monthly or annually — for a number of years you choose when you buy the annuity. Common periods are 10, 15, 20, or 30 years. If you choose a 15-year period, you receive payments every month for exactly 15 years, then the payments stop. The insurance company calculates each payment based on how much money you put in, how long the period is, and current interest rates.
If you die before the period ends, your beneficiary receives the remaining payments. For example, if you set up a 20-year period-certain annuity and die after 12 years, your beneficiary gets payments for the remaining 8 years. This makes period-certain annuities useful if you want may provide income but also want to leave money to your heirs. The monthly payment is usually lower than a life annuity because the insurance company knows exactly when the payments will end.
Life annuities: payments for as long as you live
A life annuity (also called a straight life annuity) pays you a fixed amount each month or year for the rest of your life, no matter how long you live. The insurance company calculates the payment based on your age, gender, how much you invested, and current interest rates. Once you start receiving payments, they continue until you die.
The advantage is that you cannot outlive your income — the payments never stop. The disadvantage is that if you die soon after the annuity starts, your heirs receive nothing. Some people view this as a trade-off worth making for the security of lifetime income. The monthly payment from a life annuity is usually higher than a period-certain annuity because the insurance company is taking on the risk that you live a very long time.
Joint and survivor annuities: income that continues after you die
A joint and survivor annuity pays you during your lifetime and then continues paying your spouse, partner, or named beneficiary after you die. The surviving person typically receives either the same monthly amount you were getting or a reduced amount, depending on the option you chose when you bought the annuity. Common options are 100 percent to the survivor (same payment continues) or 50 percent to the survivor (payment drops to half).
Because the insurance company is committing to pay two people instead of one, the monthly payment during your lifetime is lower than a straight life annuity. You choose the survivor and the percentage when you purchase the annuity. If your beneficiary dies before you do, the payments typically revert to the life annuity amount for the rest of your life, though this depends on your specific contract.
How the insurance company sends your payments
Once your annuity starts paying out, the insurance company has several ways to get the money to you. The most common method is direct deposit to your bank account, which happens automatically on the same day each month. You provide your bank account information when you set up the payout, and the money appears without you having to do anything.
Some insurance companies also offer checks mailed to your address, though this is less common now. A few allow you to pick up payments in person at their office, but this is rare. You typically choose your payment method when you start receiving payouts, and you can usually change it later by contacting the insurance company. Direct deposit is the fastest and most reliable option because there is no risk of a check getting lost in the mail.
Taxes on annuity payouts
How much tax you owe on annuity payments depends on where the money came from and how you structured the payout. If you bought the annuity with pre-tax money (such as from a traditional IRA or 401(k)), the entire payment is taxable as ordinary income. If you bought it with after-tax money, only the earnings portion is taxable, not the part that was your original contribution.
The insurance company will send you a Form 1099-R each year showing how much you received and how much is taxable. You report this on your tax return. If you take a lump sum, all the taxable money is reported in the year you receive it. If you take monthly payments, each payment includes a taxable portion and a non-taxable portion, and you pay taxes gradually over time. Some people find monthly payments easier to manage tax-wise because the tax bill is spread across multiple years.
What happens if you need money before the payout starts
If you have not yet started receiving payments from your annuity but need access to the money, your options are limited. Some annuities allow you to withdraw a portion of your money before the payout phase begins, though this often comes with a surrender charge — a fee the insurance company deducts from your withdrawal. The surrender charge can be 5 to 10 percent or more of the amount you withdraw, depending on how long you have owned the annuity.
Other annuities have a free withdrawal amount each year, often 10 percent of the contract value, that you can take without a penalty. If you need a large amount and your annuity does not allow penalty-free withdrawals, you may be able to sell your annuity to a third party through a process called an annuity settlement or factoring, though you will receive less than the full value. Before you bought the annuity, you should have received a document explaining the withdrawal rules — review it or contact the insurance company to understand your specific options.
Frequently Asked Questions
Can I change my payout method after I buy the annuity?
Most annuities lock in your payout method when you purchase the contract, and you cannot change it later. However, some annuities offer limited flexibility before payments begin. Check your contract or call your insurance company to ask whether changes are possible. If you are unhappy with your choice, selling the annuity to a third party is sometimes an option, though you will receive less than its full value.
What if I die before I receive all my period-certain payments?
Your beneficiary receives the remaining payments for the rest of the period. For example, if you set up a 20-year period-certain annuity and die after 8 years, your beneficiary gets payments for the remaining 12 years. The beneficiary can usually choose to receive the remaining balance as a lump sum instead of monthly payments, depending on the annuity contract.
Do I have to pay taxes on annuity payments every year?
Yes, if any portion of your payment is taxable. The insurance company calculates the taxable and non-taxable portions of each payment and reports it to you on a Form 1099-R. You report this on your tax return. If you received the annuity from a pre-tax retirement account, the entire payment is taxable. If you bought it with after-tax money, only the earnings are taxable.
How long does it take to receive my first payment?
The timing depends on when you request the payout to begin. If you set a start date when you buy the annuity, payments typically begin on that date. If you request payouts later, the insurance company usually processes your request within 30 to 60 days. Contact your insurance company for the exact timeline for your specific annuity.
Can I receive annuity payments in a different currency?
Most annuities pay in U.S. dollars to a U.S. bank account. If you live outside the United States or want payments in another currency, contact your insurance company to ask about options. Some companies can arrange international transfers, though fees may explore and the exchange rate will affect how much you receive.