Annuity Payment options

Annuity Payment Options

Upon immediate annuitization, a wide variety of options are available in the way the stream of payments is paid. If it is paid over the life of the annuitant (the person receiving the annuity payments), it would commonly be called a life annuity, but also known as a life-contingent annuity or simply lifetime annuity. If the annuity is paid over a fixed period it is known as an "annuity with period certain". The payments can also be paid over the lifetime of the annuitant(s) or for a fixed period, whichever is longer. This is known as "life with period certain".

A hybrid of these is when the payments stop at death, but also after a predetermined number of payments, if this is earlier: known as a temporary life annuity. The difference with the period certain annuity is that the period certain annuity will keep paying after the death of the annuitant until the period is completed.

Life annuities

A life or lifetime immediate annuity is most often used to provide an income in old age, i.e. a pension. This type of annuity may be purchased from an insurance company.

This annuity works somewhat like a loan that is made by the purchaser to the issuing company, who then pay back the original capital with interest to the annuitant on whose life the annuity is based. The assumed period of the loan is based on the life expectancy of the annuitant. In order to guarantee that the income continues for life, the investment relies on cross-subsidy. Because an annuity population can be expected to have a distribution of lifespans around the population's mean (average) age, those dying earlier will support those living longer.

Cross-Subsidy remains one of the most effective ways of spreading a given amount of capital and investment return over a life time without the risk of funds running out.

Life annuity variants

At a cost to the payments, an annuity can be purchased with addition of another life such as a spouse on whose life the annuity is wholly or partly guaranteed. For example, it is common to buy an annuity which will continue to pay out to the spouse of the annuitant after his death, for as long as the spouse survives. The annuity paid to the spouse is called a reversionary annuity.

Other features such as a minimum guaranteed payment period irrespective of death, known as period certain, or escalation where the payment rises by inflation or a fixed rate annually can also be purchased.

Life with period certain annuities are more palatable to people who have accumulated money and would not like to lose all of it if they were to die soon after annuitization. At least the period certain payments will be made to their beneficiary.

Impaired life annuities for smokers or those with a particular illness are also available from some insurance companies. Since the life expectancy is reduced, the payment for the purchaser is raised.

Deferred Annuties

In the case of a deferred annuity there are two phases of the annuity. The accumulation phase is the time between initial purchase and annuitization. When the annuity is turned into a stream of payments, academically it is known as the annuitization phase. Before annuitization, additional purchase payments, known as premiums may be made. In a deferred annuity, the goal is to invest the premium payments in either guaranteed accounts or variable accounts and earn investment returns. These returns can then be withdrawn when desired based on the features of the contract.

A wide variety of features have been developed by annuity companies in order to make their products more attractive. These include death benefit options and living benefit options.

Further Information

Already got those 2 quotes? Get more auto insurance quotes!

This article has been derived fully or in part from Wikipedia, the free encyclopedia, and may have been extended by the Car & Auto Insurance Staff! The article is available under the terms of the GNU Free Documentation License (GFDL).
Rest: Copyright © 2005-2006 car-auto-insurance.org