5.3 The Annuity Period (Pay-Out/Liquidation)
The annuitization period begins when the contract owner elects to convert a deferred annuity into a stream of income payments. The selected settlement option may provide payments for a specified period of time or for the lifetime of the annuitant. If a lifetime income option is chosen, the election is generally irrevocable. At this stage, the accumulated value of the annuity is used to fund the income payments.
| Lump Sum | Annuitization |
|---|---|
| The annuitant may choose to withdraw the entire annuity value in a single payment rather than receiving periodic income payments. This option may result in tax consequences and possible tax penalties, depending on the timing of the withdrawal. | Annuitization is the process of converting the annuity's accumulated value into a series of income payments that are made for life or for a specified period, depending on the settlement option selected. |
Annuity (Benefit) Payment Options
Annuity Payments – Once an annuity contract is annuitized, the insurance company assumes control of the funds in the account. In exchange, the annuitant receives a guaranteed stream of income according to the terms of the annuitization. Depending on the payout option selected, the annuitant may also designate a beneficiary to receive any remaining benefits after the annuitant's death. Annuity income payments are calculated using annuity tables, which function similarly to the mortality tables used in life insurance. Several factors determine the amount of income payments, including the accumulated value of the contract, the credited interest rate, the annuitant's age and gender, and the payout option selected. Common annuity payment options include:
- Life Income (Pure or Straight Life) – Under this option, annuity payments continue for as long as the annuitant lives. When the annuitant dies, all payments stop. Because there is no guarantee of payments after death, this option generally provides the highest periodic income compared to other payout options.
- Life Income Period Certain – Under this option, annuity payments are guaranteed for the annuitant's lifetime or for a specified period of time, whichever is longer. If the annuitant lives beyond the guaranteed period, payments continue for the remainder of the annuitant's life. If the annuitant dies before the end of the guaranteed period, the remaining payments are made to a designated beneficiary for the rest of that period.
- Life Income with Refund (Cash or Installment Refund) – Under this option, annuity payments continue for the lifetime of the annuitant. If the annuitant dies before receiving payments equal to the total premiums paid into the annuity (excluding any growth), the remaining balance is refunded to the beneficiary. The refund may be paid either as a lump-sum cash payment (cash refund) or through periodic payments (installment refund).
- Life Income Joint and Survivor – Under this option, annuity payments are made to two annuitants while both are living. When the first annuitant dies, payments continue to the surviving annuitant for the remainder of the survivor's lifetime. The survivor's payment may remain at the full amount or be reduced to a specified percentage, such as two-thirds or one-half of the original payment. Depending on the percentage selected, this option may be referred to as Joint and Full Survivor, Joint and Two-Thirds (2/3) Survivor, or Joint and One-Half (1/2) Survivor.
- Joint Life – Under this option, annuity payments are made to two or more named annuitants while all are living. Payments continue only as long as each annuitant is alive and cease upon the death of the first annuitant.
- Annuity Certain – This option provides annuity payments for a specified period of time or for a predetermined amount of periodic income. If the annuitant dies before the end of the specified period or before the account balance is fully distributed, the remaining payments are made to the designated beneficiary. An annuity that guarantees payments for a specific number of years (such as many state lottery prize payouts) is known as a fixed period option. If the payment amount is predetermined but the number of payments is not specified, the annuity is referred to as a fixed amount option. Both variations are commonly used as settlement options.
Quiz
1. When does the annuitization period begin?
A. When the annuity contract is first purchased
B. When the owner begins paying premiums
C. When the owner elects to convert the annuity value into income payments
D. When the beneficiary receives the death benefit
Correct Answer: C
Rationale: The annuitization period begins when the contract owner decides to convert the accumulated value of a deferred annuity into a stream of income payments. At this point, the payout phase replaces the accumulation phase.
2. Which annuity payout option typically provides the highest periodic payment to the annuitant? A. Life Income Period Certain
B. Joint and Survivor
C. Life Income (Straight Life)
D. Annuity Certain
Correct Answer: C
Rationale: The Life Income (Straight Life) option provides the highest periodic payment because payments are guaranteed only for the annuitant's lifetime and stop at death, meaning there is no continuing benefit to beneficiaries.
3. Which annuity payout option continues payments to a second person after the first annuitant dies?
A. Joint Life
B. Life Income with Refund
C. Joint and Survivor
D. Life Income Only
Correct Answer: C
Rationale: Under the Joint and Survivor option, payments continue to the surviving annuitant after the death of the first annuitant. The survivor may receive the full payment or a reduced percentage depending on the contract.
4. What happens to payments under the Joint Life annuity option when the first annuitant dies?
A. Payments continue to the survivor
B. Payments increase for the survivor
C. Payments stop completely
D. Payments transfer to the beneficiary
Correct Answer: C
Rationale: The Joint Life option provides payments only while all annuitants are living. Once the first annuitant dies, all payments stop, making this option different from the Joint and Survivor option.
5. What is the key characteristic of an Annuity Certain option?
A. Payments continue for the annuitant's lifetime only
B. Payments are guaranteed for a specified time or amount
C. Payments stop immediately upon the annuitant's death
D. Payments are based only on the annuitant's life expectancy
Correct Answer: B
Rationale: An Annuity Certain guarantees payments for a specified period of time or fixed amount. If the annuitant dies before the period ends or the account balance is fully distributed, the remaining payments are made to a beneficiary.