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.

• 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:

• 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.

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.

Life with Guaranteed Refund
The life with guaranteed refund annuity guarantees the payout of a minimum amount of income. This minimum amount is usually the amount of premiums that the contract owner paid into the annuity. The refund annuity guarantees the payment of any part of the premiums that has not been received by the annuitant by the time of death.

These refund options come in two forms. The installment refund option will continue the income payments to the beneficiary until those payments equal the balance of the premiums not received at the annuitant’s death. The cash refund option, on the other hand, pays this balance in a single sum to the beneficiary. The income amount from this option is similar to the amount payable by the period certain annuity.

Joint and Survivor
Annuity payments can also be designed to extend over the lives of two or more individuals jointly. A common option for married individuals is a joint and survivor (J&S) annuity, which provides monthly payments for the joint lives of two annuitants. When the first annuitant dies, payments continue for the remainder of the survivor’s lifetime. The amount paid to the survivor is defined in terms of a percentage of the payment made while both were alive. The survivor’s payment typically includes:

• The same amount that was being paid out while both were alive (J&S 100 percent) or
• Half of the amount that was being paid out while both were alive (J&S 50 percent) or
• Two-thirds of the amount that was being paid out while both were alive (J&S 66 2/3)

Payments continue as long as either of the annuitants is alive and cease when the second dies. No death benefit or refund of premiums will be paid. The income from a J&S annuity is lower than the income payable for the life of one person, assuming that the payouts are for the same age. This option is best for people who wish to guarantee lifetime income to a surviving spouse.

• Once an annuity is annuitized, no additional changes can be made to the contract.
• The payout option cannot be changed.
• The annuity cannot be surrendered, and no withdrawals can be made.

Choosing a Payout Option
There are several ways to generate an income stream by annuitizing a contract. Because everyone’s needs are unique, however, a settlement option that is appropriate for one person may not be the best for another. To help make the best payout choice, consider the following questions:

• Do you need the income to last the entire lifetime?
• Are the income payments supplementing Social Security benefits and/or qualified plan benefits?
• Will you rely on this income to pay monthly bills?
• Do you anticipate any changes to the amount of income needed?
• Do you wish to leave any unused income to a beneficiary? How important is this goal?
• How much risk is the are you willing to tolerate?
• Are you concerned about leaving enough money to a surviving spouse?
• Is this income discretionary? Is it being used to maintain a particular lifestyle?