Annuity Income Payment Options

Question 1

Life Income Payment Options

List the 4 most common settlement options involving life contingencies.

What are the similarities between an annuity income payment option and a life insurance death benefit?

Answer 1

Typical settlement options involving life contingencies include:

1. straight life income (also referred to as pure life income)
2. life income with refund guarantee
3. life income with period certain
4. joint life income

There are similarities between annuity income payment options and life insurance death benefit settlement options.

• For example, they can be based on a life contingency, where the payments last as long as the annuitant lives.
• The settlement options can be based on the length of the joint lives of two or more annuitants.
• The settlement options can also be paid on a certain basis, under which either the term or the amount of the payments is fixed.
• They may also combine a life contingency and a period certain (e.g., life annuity with ten years certain).

Question 2

Define Straight Life Income

Answer 2

Under a straight or pure life income option, income payments are made for the annuitant’s lifetime, regardless of how long that may be.

At the annuitant’s death, no further payments are made to anyone—the contract ends.

Of the various life contingency income options, the straight life income option provides the largest monthly income payment for a given amount of annuitized funds.

Question 3

Define Life Income with Refund Guarantee

Answer 3

1. A life income with refund guarantee settlement option pays the annuitant an income for life no matter how long he or she lives.
2. If the annuitant dies before total income payments equal the annuity’s annuitized sum, the refund guarantee option provides that the balance is paid to the designated beneficiary.
3. The beneficiary’s payment may be in the form of a lump-sum cash payment or as continuing monthly installment payments until the balance is zero.

Question 4

Define Life Income with Period (Term) Certain

Answer 4

The life annuity with period (or term) certain settlement option guarantees that income is paid for the length of the annuitant’s life, but for no less than a certain number of years.

Question 5

How does the Joint Life Income Option work.

What the 2 types of joint life income options?

What are the 3 payout options?

Answer 5

Generally called joint life income options, there are two common types:

• joint survivor
• joint life

Under joint survivor life income option, an income is paid until the second of the two annuitants dies. Upon the second death, no further payments are usually made to anyone.

Common joint life settlement options include:

• Joint and 100% survivor—This option pays a monthly sum to two people. Upon the death of the first, the survivor continues to receive the same amount for his or her life.
• Joint and two-thirds survivor—After the death of the first annuitant, the monthly payments made to the survivor are reduced to two-thirds of the original amount.
• Joint and one-half survivor—The survivor’s income is reduced to one-half of the original amount.

A joint survivor settlement option can also include a term certain period.

For example, a joint life with 15-year certain payout pays income to both annuitants for as long as either of them is alive. If both were to die within the first 15 years, then the beneficiary receives income payments for the balance of the 15 years.

Joint Life Option (paid until the 1st one dies) Under this option, income is paid to two or more annuitants until the first one dies. All payouts end at that point. This is not a common payout option.

Question 6

Annuity Certain Income Options

Answer 6

Common period certain options include the fixed period option and the fixed amount income option.

Question 7

Define the Fixed Period Payout Option

Answer 7

Under a fixed period annuity payout, payments are made for the specified number of years and then end.

Common fixed period payouts are 10, 15, 20, and 25 years.

Obviously, the longer the payout period, the smaller the amount of each monthly payment.

If the annuitant dies during the period, income continues to the beneficiary for the remainder of that period.

Question 8

Define the Fixed Amount Payout Option

Answer 8

1. The fixed amount payout option makes income payments for as long as it takes to entirely liquidate the annuitized principal.
2. The contract owner chooses the monthly amount.
3. Then the insurance company computes how long it will take to liquidate the principal
4. If the owner dies before the principal reaches zero, then the same payments are made to a beneficiary until the principal is entirely liquidated.

Question 9