Life Annuity: Benefits are paid monthly as long as you life. However, payments cease entirely at your death, with no payment to your spouse or estate.
Joint and Survivor Annuity: Benefits are paid monthly as long as you live. Following your death, your spouse continues to receive a portion of the income for the rest of his or her life.
Life Annuity with Term Certain: Benefits are paid monthly for as long as you live with the guarantee that they will be paid for a minimum period, for example, five or ten years. If you die before the end of the guaranteed period, benefit payments will continue to your named beneficiary to the end of the period. If you die after the end of the guaranteed period, benefits cease, with no further payment.
Cash Refund Annuity: Benefits are paid monthly for as long as you live. At your death, if the sum of all benefits paid to you does not equal the initial lump-sum value of the annuity, the difference is paid to your named beneficiary as a death benefit.
Installment Payment: You or your named beneficiary receive monthly benefits for a fixed period of time. Payment of the benefits does not depend on how long you live.
Lump Sum: One payment is made for the full value of your benefit. Federal law allows you to defer paying taxes on a lump sum from a pension, profit-sharing, or thriftand-savings plan if you set up an IRA and transfer the lump sum directly to the IRA. In this way, you can defer receiving such a lump sum until any age from 59 1/2 to 70 1/2. Various other conditions must be met to qualify for these tax exemptions. If you have such lump sums available to you, the advice of a lawyer or a knowledgeable accountant will be helpful.
Generally, the options have equivalent actuarial value. That is, based on average life expectancies, the benefits payable under the different options are adjusted so they all have the same value at retirement. Because the death benefits differ, the amounts paid can vary considerably. Table 3 shows benefits under different options for a male employee and his wife, both age 65. (Actual amounts will depend on individual plan provisions and your and your spouse's ages at retirement.)
As an example, the 65-year-old man could elect to receive $1,000 per month for life with no benefits payable after death. This might be the best choice for a single man but a married man might wish to provide continuing income to his wife. If he decides that half his benefits should go to his wife after his death, his monthly retirement income would drop to $874, but following his death, his wife would continue to receive $437 (half of $874) for the rest of her life. Alternatively, the couple might take the lump sum of $103,979 and go on the round-the-world trip they always wanted and still have "plenty left over." However "plenty left over" may not be much since taxes must be paid on the whole amount in that year. Furthermore, if the man were to choose the $1000-per-month life annuity and live exactly 15 years, the average life expectancy of a 65year-old man, he would receive a total of $180,000, over $76,000 more than the lump sum.
The best option to select depends on each individual's tax situation and the need for death benefit protection for dependents. One word of caution: For plans that offer lump-sum distributions, keep in mind that if you need to withdraw funds from the lump sum in order to live, you may outlive the principal.