Settlement Options for Annuities

Although the basic premise and reasoning for purchasing all annuities is the same, the ways that benefits may be received by the annuitant (or the annuitant's beneficiaries) can be diverse. There are a number of settlement options that can be chosen for the distribution of annuity payments. The most common are listed here:

Life Annuity – No Refund

The life annuity is a general payout category in which the payout is guaranteed for life. Sometimes known as a straight life annuity, the life annuity pays a benefit for as long as the annuitant lives, and then it ends. Whether the annuitant lives past 100 years of age or dies one month after the annuity period starts, the annuity payments will continue only until he or she dies. In other words, there is no guarantee as to the minimum amount of benefits under a life annuity.

Needless to say, there's a risk to the annuitant that he or she might not live long enough once the annuity period begins to collect the full value of the annuity. If an annuitant dies shortly after benefits begin, the insurer keeps the balance of the unpaid benefits. This settlement option will pay the highest amount of monthly income to the annuitant because it's based only on life expectancy with no further payments after the death of the annuitant.

However, many people were not pleased knowing that most or all of their investment would be lost if they were to die after receiving just a few payments. This backlash caused insurance companies to start offering alternative options that provided at least a minimum guaranteed payout, such as those listed below:

Refund Life Annuity

The length of time for which income payments will be made to the annuitant under a refund life annuity contract is the same as that for a straight life annuity. Thus, with this option the annuitant will receive payments for as long as he or she lives.

The main difference between the two is that the refund annuity guarantees an amount at least equal to the purchase price of the contract will be paid out. If the annuitant lives for an extended amount of time after annuity income payments begin, he or she could receive more in benefits than the contract cost. But, if the annuitant dies before an amount equal to the annuity's purchase price has been paid, the annuitant's beneficiary will receive the difference in cash or installment payments.

Life Annuity Certain

Another type of annuity is the life annuity with period certain, which guarantees payments for a certain minimum number of years – typically 10, 15, or 20 (most often, the period is 10 years because this is the approximate average life expectancy of a male who retires at age 65). Obviously, the annuitant could outlive the minimum number of years specified in the contract, in which case the income payments continue until his or her decease.

Under a life annuity with period certain, income installments must be paid for the number of years guaranteed in the contract. Therefore, if the annuitant dies after payments have started but before the guaranteed number of years (the "certain installments") has elapsed, the annuitant's beneficiary will receive income payments until the remainder of the guaranteed period expires. So, if Mr. Smith, the annuitant, retires at age 65 and selects the life with 10 years certain option and dies at age 70, his survivor will continue to receive the monthly annuity payments for the balance of the period certain, in this case five more years.

Joint Life Annuities and Joint Life and Survivorship

With a joint life and survivorship (or last survivor) annuity, there are more than one (usually two) annuitants, and both receive payments until one of them dies. A stated monthly amount is paid to the annuitant and upon the annuitant's death, the same or a lesser amount is paid for the lifetime of the survivor.

The joint-survivor option is usually chosen as one of three alternatives: joint and 100% survivor, joint and two-thirds survivor, or joint and 50% survivor. For example, if the annuitant was receiving $1,000 monthly under a joint and 50% survivor option, the survivor would receive $500 (50% of $1,000) monthly upon the death of the annuitant.

The joint-survivor annuity is significantly different and must be distinguished from the joint life annuity, which covers two or more annuitants and provides monthly income to each until one of them dies. Following the death of one annuitant, all income benefits cease. The joint life annuity can be viewed as a special case of the straight life annuity, with payments ending at the first death among the joint life annuitants.

Temporary Annuity Certain

As previously stated, under a life annuity with period certain, if the annuitant lives longer than the "certain" period stated in the contract, income payments continue for the lifetime of the annuitant. However, this is not the case with a temporary annuity certain. If the insured outlives the period of payments stipulated in the temporary annuity certain contract, payments stop at the end of the period.

Under a temporary annuity certain, the company guarantees that payments will be made for a specified number of years. Since this income is guaranteed, if the annuitant dies before receiving payments for the full specified period of time, the annuitant's beneficiary will receive the payments for the remaining number of years.

Deferred Annuity Death Benefits

In the case of a deferred annuity contract, the annuitant could die before receiving even one income payment under the contract – perhaps several years before the first income payment fell due. Although individual company policies can vary greatly as to what amount will be paid to the annuitant's beneficiary or other heirs, most companies refund at least the amount that the purchaser has paid for the contract up to that point (some may also include any accrued interest on that amount). And while these proceeds do not actually represent death protection like the benefits payable from a standard life insurance policy, the amount refunded from a deferred annuity may still be correctly called a death benefit.