Definition
Annuity payments are the periodic income amounts an insurer pays to the contract owner under an annuitized contract, scheduled at a fixed frequency — most commonly monthly — and continuing under terms specified in the contract, typically for the lifetime of the contract owner.
Why it matters
The annuity payment is the contract's deliverable — the actual income stream the contract owner receives in exchange for the premium paid. The size, frequency, duration, and conditions of the payments are determined by the contract terms set at annuitization, and these terms are the variables that determine what the annuity is structurally producing for the contract owner over the income phase.
How it works
Annuity payments are determined at the moment of annuitization by the contract's premium amount, the contract owner's age and sex (where actuarial pricing applies), the payout structure elected (life-only, joint and survivor, period certain, cash refund, installment refund), and the prevailing interest rate environment at the time of pricing. Once the payment schedule is set, payments commence on the specified annuity date and continue at the contracted frequency under the terms of the elected structure. For a fixed annuity payout, the payment amount is the same in each period for the life of the contract; for a variable annuity payout, the payment amount varies with the performance of the underlying subaccounts and an assumed investment rate set at annuitization. Inflation-adjusted payouts step the payment amount up over time according to a contractual formula. Annuity payments are typically taxed as ordinary income to the extent they represent earnings; the exclusion ratio determines the portion of each payment treated as return of basis.
In practice
For an individual who has annuitized a contract or is considering doing so, the specific structure of the annuity payments is the consequential decision — payment size, payment duration, what happens to a surviving spouse, what happens if the contract owner dies early in the payout period, and whether any minimum guaranteed amount is paid regardless of life span. The decision is generally irrevocable, which makes pre-annuitization deliberation important. A professional advising on annuitization should walk an individual through the payment outcomes under each available payout structure, including the implications for any beneficiaries and for the contract owner's other resources. Plan fiduciaries considering in-plan annuitization options apply the same scrutiny at plan level — the participant population's anticipated payment outcomes under each available structure inform whether the option is appropriate for inclusion.
Related terms
- Annuitization
- Payout rate
- Life-only payout
- Joint and survivor annuity
- Period certain
- Income phase
- Exclusion ratio
- Single premium immediate annuity (SPIA)