Money Matters

So how do annuities get dispersed?

During retirement, your annuity funds can be withdrawn from the contract in a different ways. There are two types of annuities available to investors:

Immediate annuity: You give the company a large sum of money, and your payments start immediately. This option would appeal to someone in their 60s.

Tax-deferred annuity: You give the company a large sum up front or make monthly payments until you reach retirement age. The money grows tax-free until you retire. This works best for someone who has a big chunk of change to put up front and at least 20 years to wait for the money to grow tax-free before setting up a schedule of lifetime payments that would start after retirement.

There also are different ways to be paid back.

Systematic Withdrawals: These enable the owner to pre-authorized periodic withdrawals. The owner of the contract instructs the company to withdraw a percentage or a level-dollar amount from the contract on a monthly, quarterly, semiannual, or annual basis. Checks are sent directly to the owner or can be deposited directly into the owner’s checking account. It can also be withdrawn in a lump sum. If you die before your investment is paid back to you, the lump sum is passed on to your heirs. But if you live longer than the schedule of payments, that’s it, no more.

Fixed Accounts: With this option, you are converting a lump sum into an income stream. When you choose “annuitization,” it can be considered a reverse life-insurance policy, in that you are insuring against living longer than you expected. In essence, the owner of the annuity receives a monthly income, which will be paid to him or her until death.

If the purchaser chooses this sort of annuity, income will flow for life, even if the account value is depleted. But if you die before your money is paid back, the insurer keeps it, not your heirs. Insurers can afford to do this in the same manner as they can afford to pay life insurance to people who die young — from the pools of premiums paid by those who don't.

Some industry trackers say fewer than 50 percent of annuities ever reach that stage, making it a great investment for the insurance company.