Once you place your annuity under a settlement option, you will begin receiving a steady stream of income. The monthly or annual payments you receive are guaranteed by the claims-paying ability of the issuing company regardless of how long you live—even if the total payments should exceed the accumulated account value of your annuity.*

• How Payments Are Determined
  Payments are designed to provide income over a specified period of time. If payments are to continue for one or two lives, the income is determined by estimating the number of years the insurance company expects to make payments, based on life expectancy annuity tables.

• How Payments Are Taxed
  Once you place a nonqualified annuity under a payment plan, each payment is considered part nontaxable and part taxable income. This is because your initial purchase payment and any additional contributions you made were with after-tax money. An exclusion ratio is determined for each payment which then determines the amount of each payment to be excluded from taxes.
  
  For qualified annuities (purchased through a qualified plan such as a 401(k)), your initial payment, any additional contributions and interest earnings were all untaxed. Therefore, 100% of each payment you receive will be considered taxable income.

• Avoiding Federal Tax Penalties
  In order to discourage investors from withdrawing early from nonqualified annuities, the government imposes a 10% federal tax penalty on amounts withdrawn to age 59 1/2 (see Section 72(q) of the Internal Revenue Code). Should you choose the option to settle your contract either on a lifetime or two lifetimes before age 59 1/2, your withdrawals qualify as an exception to the penalty rule and will not be subject to the additional 10% tax. Those who are planning for early retirement may find this option advantageous.

• Settlement Considerations
  Once an annuity contract is settled, the owner loses the right to make withdrawals beyond the scheduled payments, and the right to surrender the contract. Settlement plans offer several kinds of payments, including lump sum, specified number of years, or life-long payment plans.