Choosing an Income Stream Immediately or Deferring It is an Important Decision

Date posted: September 30, 2013

Typically we think there are two choices when you decide the point at which you will receive income from your annuity.  Now, with an immediate annuity, or later, with a deferred annuity are your options.  But in Stan Haithcock’s Martkewatch article, “Annuities: Income now, later – or never,” he points to a third option that more people are actually using.  Believe it or not, a lot of the income riders attached to deferred annuities are never used.  

If you think there is a possibility that you will never use your income rider, make sure to add death benefits to you annuity policy.  That way if you are not using the income, your heirs will be able to receive income payments, usually over a five year time frame.  I am surprised that more people are not annuitizing their income rider, but I equate the actual low percentages to the fact that they have been most popular since the 2008 economic crisis and a lot of the people who bought them are still working.

It’s no secret that Stan recommends using annuities only for income and not for growth.  While we do think that some people will benefit from using variable annuities and indexed annuities to grow their money, we do believe that receiving lifetime income payments is one of the biggest benefits to using annuities.  The decision you have to make is whether you want to start receiving your income now or at a point sometime in the future. 

When using an annuity for income, your value enters the picture at the point in your life when all of the money you put into the annuity is depleted and you are getting your annuity payments from the insurance company’s funds.  The simplest way to receive income now is with a single premium immediate annuity.  Income payments start a month after your annuity purchase and continue for the rest of your life or even the rest of a spouse’s life as well.  Everyone who buys an annuity is hopeful that they will live long enough to enjoy the risk transfer to the insurance company, but the insurance against outliving your money is still worth the annuity regardless.

If you aren’t ready to receive income immediately, you can opt for a deferred annuity.  Just as with the former, the payments of the latter are based on actuarial tables that estimate your life expectancy.  Deferred income annuities are one option for waiting to receive income later.  You can even wait up to 45 years before starting your income stream.  Commissions are low and there are no fees with this pension-like income choice.  The other way to defer your annuity payments is to add an income rider onto any deferred annuity.  

Many people choose the annuity by the type of fixed, variable, or indexed benefits and then add the income rider on.  While Stan thinks the income rider should be the most important consideration, work with your advisor to see the best benefit to your future plans.  If you plan to use an annuity for lifetime income whether it be now or later, great.  

The option of never using the income stream may mean that you don’t need the lifetime income feature because of other sources of income.  If that is the case, look into a different type of annuity for different protective benefits.