7.3.3 Payout Options
The amount of an individual's annuity payments depends on how much principal was invested, the amount of interest earned and the income period selected.
There are a number of payment options available through annuities. Which one is better is dependent upon the policyowner's objectives. The payout period can be a specified term of years, for life, or a combination of the two.
Policyowners are also entitled to a paid-up deferred variable annuity. What does this statement mean?
A paid-up deferred variable life annuity is a nonforfeiture option available (except in specified amount situations) to all variable annuity policyowners who discontinue premium payments. The policyowner in this situation is credited with a paid-up policy that will provide an annuity based on the value of units credited to the contract up to the time when premium payments were discontinued.
Straight Life Income
The straight life income annuity option pays the annuitant a guaranteed income for his or her lifetime. If the annuitant dies before the entire proceeds are paid out, the remainder of the principal is basically forfeited. The insurer will use the remainder of the principal to cover those annuities for which the annuitants have outlived their principal payments (lived longer than expected).
Cash Refund Option
The cash refund option provides a guaranteed income to the annuitant for life just as the straight life method above does. The difference is that if the insured dies prematurely, the balance of the principal is paid out in a lump sum to the annuitant's beneficiary.
Installment Refund Option
The installment refund option guarantees that the total annuity will be paid to the annuitant or the annuitant's beneficiary. The difference here is that the remaining principal will not be paid to the beneficiary in a lump sum as the cash refund payout does. Instead, the beneficiary will receive the same payments that the annuitant received until the principal balance is depleted.
Life with Period Certain Option
The life with period certain option is also known as the "life income with term certain" option. This option is akin to the installment refund option except that it contains two timeframes for payout, not just at death. This annuity can be stipulated to pay out for the annuitant's lifetime or for a certain number of years. Say the annuity provides income for life or ten years, then whichever comes first is the determining factor in when the payments will cease. If the annuitant dies after five years of payout, the beneficiary will receive payments for only the five years remaining.
This option provides for lifetime payments to the annuitant and guarantees a certain minimum term of payments, whether or not the annuitant is living.
Period Certain Option
The period certain option is basically the same as the life with period certain option except that payments strictly adhere to a specified timeframe. In the above scenario, it would not provide income for life or ten years; it would provide income for only ten years.
Joint and Full Survivor Option
The joint and full survivor option provides for payments to be split among two annuitants. If one dies, the survivor receives the rest of the principal. However, when the survivor dies, no further payments are made to anyone. There are two suboptions that can be utilized.
- The joint and two-thirds survivor option allows for the survivor's income to be reduced to two-thirds of the original joint income.
- The joint and one-half survivorship option allows for the survivor's income to be reduced to one-half of the original joint income.
Annuities certain
Although the choices related to annuitization uniquely allow an annuitatnt to be certain that her fixed or variable annuity will extend for her remaining lifetime, and although these choices are also uniquely tax-advantaged as we will discuss later, these are certainly not the onlyw ays to take distribution or even the most common. Annuity certain distributions allow an annuitant to dictate either the amount (fixed amount option) or the time period (fixed period option) of the distribution, which will then continue until the annuity is exhausted or the annuitant dies. If the annuitant dies before the distribution is completed, payments may then be made to a named beneficiary or to the annuitant's estate.
Partial withdrawls or lump sum
Under this arrangement, sometimes called the "no-plan" plan, the annuitant surrenders the annuity contract all at once or makes random withdrawls until the funds are exhausted. Although this approach is the antithesis of a planned or orderly distribution, it does demonstrate the flexibility of the annuity as a savings or investment vehicle.
