What Is the Payout Phase?

The payout phase in an annuity is the phase when payments are made to the annuitant. These usually distribute on a monthly basis and last for the lifetime of the annuitant. The income a retired investor receives from an annuity is taxable income.

Understanding the Payout Phase

The payout phase comes after the accumulation phase when an annuitant builds assets for retirement through their annuity portfolios. Once withdrawn, the gains are taxed as ordinary income.

Most annuities have a minimum age at which an annuitant can begin the payout phase without incurring an early withdrawal penalty, and they can also include provisions to continue payments until both the annuitant and his/her spouse are deceased. Annuitization is irreversible: once in the payout phase, the annuitant cannot continue to build assets and increase the value of their annuity portfolio.

To Begin Receiving Payments

When annuitants are ready to begin receiving payments from their annuities, they notify the insurance company of their decision to do so. At the beginning of the payout phase, the investor may receive a lump-sum payment or may choose to receive the payout as a stream of payments at regular intervals. Actuaries use mathematical models and life expectancy tables to compute payment amounts, which will last for the life of the annuitant: the longer one waits, the larger one's payments will be.

Types of Payout Phases

If the investor chooses a stream of payments versus a one-time payout, they may choose to receive payments that are fixed in amount or payments that vary based on the performance of mutual fund investment options. The amount of each periodic payment will depend, in part, on the time period selected for receiving payments.

When the investor decides to annuitize the contract, a specific payment option, which usually cannot be changed in any way, is locked into the annuity. The value of the account can either be drawn in a lump sum or annuitized over the investor's lifetime.

Payout Options

There are several annuity payout options available. These include the following:

  • Life annuity, which provides the largest periodic payments
  • Life annuity with period certain, which guarantees payment over a certain period of time (in addition to lifetime payments, and the beneficiary will receive payments for the remainder of a certain period if the annuitant dies)
  • Joint life with the last survivor, which covers two or more people, usually a husband and wife, and continues payments to the survivor after the death of the first person
  • Life contingency, which is an annuity with an attached death benefit