Annuity Payout Options
Upon an annuity’s starting date, the accumulation period ends, and the annuitization period begins. Before the annuity starting date, contract owners who choose to annuitize must select an annuitization option. Annuitization options are often called settlement options; they are the various methods available to the contract owner to “settle” or receive income from the contract’s accumulated funds. Immediate and deferred annuity owners have the same choice of payout options:
- life only
- life with period certain
- period certain
- fixed amount
- life with guaranteed refund
- joint and survivor
Life Only
A life-only (or straight life) annuity provides monthly payments to the annuitant for his or her lifetime. Payments cease when the annuitant dies, and no other benefit is paid to any beneficiary. The remaining principal, if any, is forfeited. However, if the individual lives beyond his or her life expectancy, payments will continue for as long as he or she lives. At any given age, a life-only annuity provides the largest monthly benefit for a given amount of money.
A life-only (or straight life) annuity provides monthly payments to the annuitant for his or her lifetime. Payments cease when the annuitant dies, and no other benefit is paid to any beneficiary. The remaining principal, if any, is forfeited. However, if the individual lives beyond his or her life expectancy, payments will continue for as long as he or she lives. At any given age, a life-only annuity provides the largest monthly benefit for a given amount of money.
- The life-only payout option provides the highest possible monthly life income.
- The life-only payout option is suitable for people without dependents or who do not need to provide for a beneficiary.
- The risk is that the annuitant will die early, and the remaining funds will revert to the insurance company.
- The life-only payout option is also suitable if you have Permanent Life Insurance that is equal to or greater then the annuitized amount, to replace the lost asset to the remaining spouse or beneficiaries.
Life with Period Certain
A life with period certain annuity guarantees benefit payments for a specific number of years, regardless of whether the annuitant lives or dies. If an individual selects a five-year period certain annuitization option, he or she is guaranteed to receive periodic payments for as long as he or she lives, but for at least five years even if he or she dies before.
For example, if an individual has received periodic payments for four years when he or she dies, payments will continue to a designated beneficiary for one year. Similarly, if funds are annuitized under a life annuity with a ten-year period certain, then periodic payments will continue for the annuitant’s entire life but for at least ten years. A life with period certain annuity provides two important guarantees:
Under a life annuity with period certain, the annuitant can designate any period certain to which the insurer will agree. The most common periods certain are 5 years, 10 years, and 20 years.
Note that the amount of a period certain life annuity’s payments will be somewhat smaller than those of a life-only annuity. In addition, the longer the period certain guarantee, the lower the monthly benefit payments. This decrease occurs because a part of the annuity funds is used to provide the guarantee feature.
A life with period certain annuity guarantees benefit payments for a specific number of years, regardless of whether the annuitant lives or dies. If an individual selects a five-year period certain annuitization option, he or she is guaranteed to receive periodic payments for as long as he or she lives, but for at least five years even if he or she dies before.
For example, if an individual has received periodic payments for four years when he or she dies, payments will continue to a designated beneficiary for one year. Similarly, if funds are annuitized under a life annuity with a ten-year period certain, then periodic payments will continue for the annuitant’s entire life but for at least ten years. A life with period certain annuity provides two important guarantees:
- Payments will continue for the annuitant’s entire life (or joint annuitants’ entire lives), regardless of how long that life (or lives) turns out to be.
- Payments will continue for at least a minimum period of time, even if the annuitant dies. This minimum amount of time is called the period certain.
Under a life annuity with period certain, the annuitant can designate any period certain to which the insurer will agree. The most common periods certain are 5 years, 10 years, and 20 years.
Note that the amount of a period certain life annuity’s payments will be somewhat smaller than those of a life-only annuity. In addition, the longer the period certain guarantee, the lower the monthly benefit payments. This decrease occurs because a part of the annuity funds is used to provide the guarantee feature.
Period Certain
A period certain payout option provides payments for a certain number of years without regard to life contingency. Instead, it guarantees benefit payments for a certain length of time, such as five, ten, or twenty years, whether or not the annuitant is living. At the end of the stated term, all payments end. If the annuitant dies before the end of the stated period, the beneficiary receives the income until the end of the term. Under this settlement option, the annuitant can outlive his or her money if he or she survives the selected fixed period.
A period certain payout option provides payments for a certain number of years without regard to life contingency. Instead, it guarantees benefit payments for a certain length of time, such as five, ten, or twenty years, whether or not the annuitant is living. At the end of the stated term, all payments end. If the annuitant dies before the end of the stated period, the beneficiary receives the income until the end of the term. Under this settlement option, the annuitant can outlive his or her money if he or she survives the selected fixed period.
Fixed Amount Option
The fixed amount option provides for the payment of a fixed amount of income stream until the principal and interest have been exhausted. As with the fixed period option, this settlement option is not based on mortality but on basic economic principles and number-crunching calculations. If the annuitant dies before all of the proceeds have been paid out, the remainder is paid to the beneficiary. Under this settlement option, it is possible for the annuitant to outlive his or her money if he or she survives the exhaustion of capital.
The fixed amount option provides for the payment of a fixed amount of income stream until the principal and interest have been exhausted. As with the fixed period option, this settlement option is not based on mortality but on basic economic principles and number-crunching calculations. If the annuitant dies before all of the proceeds have been paid out, the remainder is paid to the beneficiary. Under this settlement option, it is possible for the annuitant to outlive his or her money if he or she survives the exhaustion of capital.