Annuity Income and Survivor Options

Introduction to Annuitization and Settlement Categories

Annuitization is the process of converting an accumulated annuity balance into a stream of periodic income payments. Once an annuity is annuitized under a life contingency option, the election is generally irrevocable. You must ensure that clients understand this permanence before they commit their accumulated funds.

Annuity payout options are broadly divided into life contingency options and annuities certain. Life contingency options tie payments to survival: a single-life annuity pays for the annuitant's life, but a joint-life annuity stops when the first covered person dies. To make this lifetime guarantee possible, insurers rely on longevity pooling. Longevity pooling allows an insurer to use the funds of annuitants who die early to support payments to annuitants who live exceptionally long.

In contrast, annuities certain base payments solely on a specified period or specified dollar amount, without regard to the survival of the annuitant. Neither the fixed period nor the fixed amount annuity certain guarantees lifetime income. An annuity certain with a fixed period pays income for a specified duration, such as 10 or 20 years, regardless of whether the annuitant lives or dies. An annuity certain with a fixed amount pays a designated dollar amount per period until the principal and interest are completely exhausted. If the payee of an annuity certain dies before payments end, remaining payments generally go to a named beneficiary or are handled as the contract provides.