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What is Annuity Income?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 September 2016
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Annuity income is any type of income that is provided in the form of benefits from a life insurance policy. Typically, the annuity is not the death benefit, but a series of structured payments that are paid to the policyholder during his or her lifetime. In the event that any payout remains due at the time of the policyholder’s death, the remaining annuity is provided to the beneficiary named in the terms and conditions of the policy, effectively converting the annuity into a death benefit.

One of the main reasons for structuring an annuity income arrangement is to provide a source of income in the event that the policyholder outlives the life of other income sources. From this perspective, the annuity can be seen as an income source that can be drawn upon when other means of income are no longer viable. For example, if the stocks owned by the investor were to decrease in value, resulting in lower dividends, the annuity income could be used to offset the loss and allow the policyholder to maintain the same standard of living.

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Creating an annuity income scheme is also a good way to provide for loved ones with relatively little effort. A retiree could initiate the monthly payments and enjoy the benefit of those payments for the rest of his or her life. By naming a child or spouse as the beneficiary, those same payments can continue when the policyholder dies, with the payments directed to that beneficiary.

There are several different ways to arrange for annuity income. The coverage can be established with one lump sum payment of the premium. From there, the policyholder may choose to initiate a series of disbursements that begin immediately. It is also possible to defer the initiation of those disbursements until a later date, allowing an individual to establish the annuity during his or her working years and have the annuity begin issuing payments at some point after retirement. The payments can be arranged to take place on demand, or on a monthly, quarterly, or annual basis.

Another option is known as a joint and life survivor annuity income scheme. With this arrangement, both the policyholder and the beneficiary can receive payments from the annuity during the lifetime of the policyholder, with all payments redirected to the beneficiary once the policyholder dies. Just about any type of annuity income can be structured with a variable or fixed rate approach. An annuity fixed income policy would accrue a fixed rate of interest on the balance deposited into the plan, and the disbursements are the same from one period to the next. With a variable annuity, the annuity income would vary from one period to another, since the variable rate of interest would be affected by the performance of the investments that are used to underwrite the coverage.

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