Personal Finance

Monthly Annuity Payment - Which Option Would You Choose?

  • Last Updated:
  • Sep 21st, 2018 7:44 am
[OP]
Member
Jul 22, 2015
486 posts
104 upvotes
Ontario

Monthly Annuity Payment - Which Option Would You Choose?

Hi all, I have a fmily member who is turning 65 shortly and needs to pick an option for their annuity. The annuity holder is a female turning 65. Spouse is 70. Both have some health issues, same in severity. I realize no one has a crystal ball and knows who will pass away first and at what ages; and that the monthly amounts below do not differ much, but if you were in this scenario, which option would you choose?

Option 1 - Life only - You would receive an annuity of $445.36 per month for life. No further payments after death.

Option 2 - Guarantee for 60 months - You would receive an annuity of $442.39 per month for life. If you should die within 60 months, your annuity would continue to be paid to your beneficiary for the remainder of the 60 months. If you die after the 60 months, there would be no further payments made.

Option 3 - Guarantee for 120 months - You would receive an annuity of $433.24 per month for life. If you should die within 120 months, your annuity would continue to be paid to your beneficiary for the remainder of the 120 months. If you die after the 120 months, there would be no further payments made.

Option 4 - Guarantee for 180 months - You would receive an annuity of $418.03 per month for life. If you should die within 180 months, your annuity would continue to be paid to your beneficiary for the remainder of the 180 months. If you die after the 180 months, there would be no further payments made.

Option 5 - 100% Payable to Survivor - You would receive an annuity of $407.26 per month for life. After your death, your spouse, if living, would continue to receive $407.26 until your spouse's death.

Option 6 - 66.67% Payable to Survivor - You would receive an annuity of $419.21 per month for life. After your death, your spouse, if living, would continue to receive $279.49 until your spouse's death.

Option 7 - 60% Payable to Survivor - You would receive an annuity of $421.69 per month for life. After your death, your spouse, if living, would continue to receive $253.01 until your spouse's death.
11 replies
Deal Addict
Jan 19, 2017
1591 posts
738 upvotes
Acheewawa wrote:
Sep 19th, 2018 1:14 pm
Hi all, I have a fmily member who is turning 65 shortly and needs to pick an option for their annuity. The annuity holder is a female turning 65. Spouse is 70. Both have some health issues, same in severity. I realize no one has a crystal ball and knows who will pass away first and at what ages; and that the monthly amounts below do not differ much, but if you were in this scenario, which option would you choose?

Option 1 - Life only - You would receive an annuity of $445.36 per month for life. No further payments after death.

Option 2 - Guarantee for 60 months - You would receive an annuity of $442.39 per month for life. If you should die within 60 months, your annuity would continue to be paid to your beneficiary for the remainder of the 60 months. If you die after the 60 months, there would be no further payments made.

Option 3 - Guarantee for 120 months - You would receive an annuity of $433.24 per month for life. If you should die within 120 months, your annuity would continue to be paid to your beneficiary for the remainder of the 120 months. If you die after the 120 months, there would be no further payments made.

Option 4 - Guarantee for 180 months - You would receive an annuity of $418.03 per month for life. If you should die within 180 months, your annuity would continue to be paid to your beneficiary for the remainder of the 180 months. If you die after the 180 months, there would be no further payments made.

Option 5 - 100% Payable to Survivor - You would receive an annuity of $407.26 per month for life. After your death, your spouse, if living, would continue to receive $407.26 until your spouse's death.

Option 6 - 66.67% Payable to Survivor - You would receive an annuity of $419.21 per month for life. After your death, your spouse, if living, would continue to receive $279.49 until your spouse's death.

Option 7 - 60% Payable to Survivor - You would receive an annuity of $421.69 per month for life. After your death, your spouse, if living, would continue to receive $253.01 until your spouse's death.
if they are going to live for a long time, then option 5.
Deal Fanatic
Nov 24, 2013
5651 posts
2246 upvotes
Kingston, ON
At a first glance, I'd lean option 4. No one has a crystal ball, as you say, but the odds are a 70 year old male won't outlive a 65 year old female. The guarantees (2-4) seem to pay a "beneficiary" (assuming this is any relative you want, like a child or grandchild) instead of a surviving spouse, so any of those would be better than the survivor options.

If the 65 year old female lives to 70, Option 1 > 2. If she lives to 75, Option 1 > 3. If she lives to 80, Option 1 > Option 4. But if she dies at 77, Option 4 would be $10,000 ahead of Option 1. If she dies at 75, Option 4 would be $20,000 ahead. Meanwhile, if she lives to 85, she'd only be $6,500 ahead with Option 1 over Option 4. If she lives to 90, she'd be $8,000 ahead. Especially considering time value of money (I see no mention of an indexing option), it seems prudent to take the 15 year guarantee. You stand to lose too much "dying early" under Option 1, relative to small gains from living longer.

Phrased differently, if she lived to 100, she'd have collected $187,051 under Option 1, and $175,573 under Option 4. If she only lived to 66, she'd collect $5,344 under Option 1, but $75,245 under Option 4. Would you risk a $70,000 loss for at most a $11,500 gain? The odds are better putting the entire annuity on Red at a casino.
Member
Nov 28, 2017
430 posts
345 upvotes
I mean, it really depends on their finances and how reliant they will be on the money.

It would be nice to give a simple answer, but this is not a simple question of dollars because not all dollars are equal.

In other words, if their combined lifestyle with option 5 (lowest paying) would be satisfactory/comfortable, but he would have major lifestyle disruptions if he survived her and did not have this annuity, then it may make sense to take the guarantees. They might get less money out of it, but if it locks in comfort it could make sense. To figure that out, you'd need to figure out how much other income would go down if she passed, and how much lower his costs would be)

And on the other hand, if they are already fairly secure without this, things could swing quite far in the other direction. With him being 70 and male, the chances of him outliving her by a significant amount of time really aren't high. So if this is just comfortable people looking for the maximum back, then no guarantees at all make sense.
Deal Addict
User avatar
Sep 9, 2012
3475 posts
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Oakville, ON
Mike15 wrote:
Sep 19th, 2018 2:01 pm
At a first glance, I'd lean option 4. No one has a crystal ball, as you say, but the odds are a 70 year old male won't outlive a 65 year old female. The guarantees (2-4) seem to pay a "beneficiary" (assuming this is any relative you want, like a child or grandchild) instead of a surviving spouse, so any of those would be better than the survivor options.

If the 65 year old female lives to 70, Option 1 > 2. If she lives to 75, Option 1 > 3. If she lives to 80, Option 1 > Option 4. But if she dies at 77, Option 4 would be $10,000 ahead of Option 1. If she dies at 75, Option 4 would be $20,000 ahead. Meanwhile, if she lives to 85, she'd only be $6,500 ahead with Option 1 over Option 4. If she lives to 90, she'd be $8,000 ahead. Especially considering time value of money (I see no mention of an indexing option), it seems prudent to take the 15 year guarantee. You stand to lose too much "dying early" under Option 1, relative to small gains from living longer.

Phrased differently, if she lived to 100, she'd have collected $187,051 under Option 1, and $175,573 under Option 4. If she only lived to 66, she'd collect $5,344 under Option 1, but $75,245 under Option 4. Would you risk a $70,000 loss for at most a $11,500 gain? The odds are better putting the entire annuity on Red at a casino.
Agree with the analysis assuming that the beneficiary can be somebody other than the spouse. This is implied as it’s been described, but should be clarified for greater certainty.
Jr. Member
Jun 14, 2018
133 posts
170 upvotes
Personally, I would go with option 5. The difference in payments seems like a small price to pay to ensure both you and your spouse continue to receive payments for the rest of your lives.
Deal Fanatic
Nov 24, 2013
5651 posts
2246 upvotes
Kingston, ON
MarinersFanatik wrote:
Sep 19th, 2018 9:29 pm
Personally, I would go with option 5. The difference in payments seems like a small price to pay to ensure both you and your spouse continue to receive payments for the rest of your lives.
Comparing 4 and 5, 4 is better if the annuitant outlives the spouse, or if the spouse dies at 85 or younger. I guess the question to weigh is how threadbare would the spouse be if they lost $400/mo at age 85?
[OP]
Member
Jul 22, 2015
486 posts
104 upvotes
Ontario
Mike15 wrote:
Sep 19th, 2018 2:01 pm
At a first glance, I'd lean option 4. No one has a crystal ball, as you say, but the odds are a 70 year old male won't outlive a 65 year old female. The guarantees (2-4) seem to pay a "beneficiary" (assuming this is any relative you want, like a child or grandchild) instead of a surviving spouse, so any of those would be better than the survivor options.

If the 65 year old female lives to 70, Option 1 > 2. If she lives to 75, Option 1 > 3. If she lives to 80, Option 1 > Option 4. But if she dies at 77, Option 4 would be $10,000 ahead of Option 1. If she dies at 75, Option 4 would be $20,000 ahead. Meanwhile, if she lives to 85, she'd only be $6,500 ahead with Option 1 over Option 4. If she lives to 90, she'd be $8,000 ahead. Especially considering time value of money (I see no mention of an indexing option), it seems prudent to take the 15 year guarantee. You stand to lose too much "dying early" under Option 1, relative to small gains from living longer.

Phrased differently, if she lived to 100, she'd have collected $187,051 under Option 1, and $175,573 under Option 4. If she only lived to 66, she'd collect $5,344 under Option 1, but $75,245 under Option 4. Would you risk a $70,000 loss for at most a $11,500 gain? The odds are better putting the entire annuity on Red at a casino.
You make some excellent points that I didn't consider. I had assumed that "beneficiary" meant spouse, but will need to get clarification on this. Thanks for mentioning this!
[OP]
Member
Jul 22, 2015
486 posts
104 upvotes
Ontario
nevyn1234 wrote:
Sep 19th, 2018 2:36 pm
I mean, it really depends on their finances and how reliant they will be on the money.

It would be nice to give a simple answer, but this is not a simple question of dollars because not all dollars are equal.

In other words, if their combined lifestyle with option 5 (lowest paying) would be satisfactory/comfortable, but he would have major lifestyle disruptions if he survived her and did not have this annuity, then it may make sense to take the guarantees. They might get less money out of it, but if it locks in comfort it could make sense. To figure that out, you'd need to figure out how much other income would go down if she passed, and how much lower his costs would be)

And on the other hand, if they are already fairly secure without this, things could swing quite far in the other direction. With him being 70 and male, the chances of him outliving her by a significant amount of time really aren't high. So if this is just comfortable people looking for the maximum back, then no guarantees at all make sense.
They're not reliant on this income at all, but want to get the maximum payout. You've made some great points. Thanks for your input!
[OP]
Member
Jul 22, 2015
486 posts
104 upvotes
Ontario
Mike15 wrote:
Sep 20th, 2018 1:03 pm
Comparing 4 and 5, 4 is better if the annuitant outlives the spouse, or if the spouse dies at 85 or younger. I guess the question to weigh is how threadbare would the spouse be if they lost $400/mo at age 85?
Good point. Neither one "needs" the money to live comfortably at this point, but they want to maximize what they get out of their annuity.
Jr. Member
Jun 14, 2018
133 posts
170 upvotes
Mike15 wrote:
Sep 20th, 2018 1:03 pm
Comparing 4 and 5, 4 is better if the annuitant outlives the spouse, or if the spouse dies at 85 or younger. I guess the question to weigh is how threadbare would the spouse be if they lost $400/mo at age 85?
Sure, but the difference between option 4 and 5 is only $11 per month. Odds are the spouse won't live until he's 85, but for a measly $11 difference, that's worth the peace of mind, at least for me.
Deal Fanatic
Nov 24, 2013
5651 posts
2246 upvotes
Kingston, ON
MarinersFanatik wrote:
Sep 20th, 2018 11:25 pm
Sure, but the difference between option 4 and 5 is only $11 per month. Odds are the spouse won't live until he's 85, but for a measly $11 difference, that's worth the peace of mind, at least for me.
IMO I like the guarantee’s peace of mind (again, assuming “beneficiary” can be non-spouse, or “to the estate of”), but to each their own. Knowing I’d (my heirs) get a high floor amount of money back from the annuity and that it wouldn’t just disappear if both of us died before 80/85, makes me feel better about the annuity purchase.

In a way I guess it varies on the couple’s financial positions. If the couple doesn’t have much other retirement income or savings and the surviving spouse would be dependent on this income, by all means 5 has merit. 4 provides an income for life for the annuitant too, so it’s all about the spouse’s circumstance.

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