Life Contingent Options
When an annuity is annuitized, the owner must select a payout option. Life contingent options base payments on the annuitant's life expectancy and provide income for as long as the annuitant lives.
Understanding Annuitization
Annuitization is the process of converting an annuity's accumulated value into a stream of periodic income payments.
Key Annuitization Concepts
| Concept | Description |
|---|---|
| Irrevocable | Once annuitized, the decision cannot be reversed |
| Payout calculation | Based on age, gender (if used), and payout option |
| Mortality credits | Those who die early subsidize payments to those who live longer |
| Guaranteed payments | Life options guarantee income for life |
Life Only (Straight Life) Annuity
The Life Only option (also called Straight Life or Pure Life) provides the highest periodic payment but no guarantee to beneficiaries.
How Life Only Works
| Feature | Description |
|---|---|
| Payments | Continue for annuitant's lifetime |
| At death | Payments stop immediately—no remaining payments to beneficiaries |
| Payment amount | Highest of all life options |
| Best for | Those prioritizing maximum income over legacy |
Life Only Considerations
Advantages:
- Maximum income per dollar annuitized
- Guaranteed income for life
- Protection against outliving money
Disadvantages:
- No payments to beneficiaries after death
- If annuitant dies early, principal may be "lost"
- No inflation adjustment (unless added)
Exam Tip: Life Only provides the HIGHEST payments because there's no guarantee to beneficiaries. The insurance company keeps any remaining value if the annuitant dies early.
Life with Period Certain
Life with Period Certain guarantees payments for a minimum number of years, even if the annuitant dies during that period.
Common Period Certain Options
| Option | Guarantee Period |
|---|---|
| Life with 5-Year Certain | Minimum 5 years |
| Life with 10-Year Certain | Minimum 10 years |
| Life with 15-Year Certain | Minimum 15 years |
| Life with 20-Year Certain | Minimum 20 years |
How Life with Period Certain Works
| Scenario | What Happens |
|---|---|
| Annuitant lives beyond period | Payments continue for life |
| Annuitant dies during period | Remaining guaranteed payments go to beneficiary |
| Annuitant dies after period | Payments stop—nothing to beneficiary |
Example: Life with 10-Year Certain
| If Annuitant Dies... | Beneficiary Receives |
|---|---|
| After 3 years | 7 more years of payments |
| After 8 years | 2 more years of payments |
| After 10 years | Nothing (period ended) |
| After 15 years | Nothing (period ended) |
Period Certain Considerations
Advantages:
- Guaranteed minimum payout period
- Protects beneficiaries if annuitant dies early
- Still provides lifetime income
Disadvantages:
- Lower payments than Life Only
- Longer guarantee period = lower payments
- No benefit if annuitant outlives period
Joint and Survivor Annuity
A Joint and Survivor option provides income for two lives, continuing to the survivor after the first death.
Common Joint and Survivor Options
| Option | Survivor Receives |
|---|---|
| 100% Joint and Survivor | Survivor receives same payment amount |
| 75% Joint and Survivor | Survivor receives 75% of original payment |
| 66⅔% Joint and Survivor | Survivor receives two-thirds of original payment |
| 50% Joint and Survivor | Survivor receives half of original payment |
How Joint and Survivor Works
| Event | Payment Effect |
|---|---|
| Both annuitants alive | Full payment to joint annuitants |
| First annuitant dies | Payments continue to survivor at specified percentage |
| Second annuitant dies | All payments stop |
Example: 50% Joint and Survivor
Original payment: $2,000/month
| Status | Monthly Payment |
|---|---|
| Both alive | $2,000 |
| After first death | $1,000 (50% to survivor) |
| After second death | $0 |
Joint and Survivor Considerations
Advantages:
- Income protection for surviving spouse
- No risk of outliving income for either person
- Popular for married couples
Disadvantages:
- Lower initial payment than single life options
- 100% J&S has lowest payments
- Both must be alive at annuitization
Exam Tip: The higher the survivor percentage, the LOWER the initial payments. 100% Joint and Survivor has lower payments than 50% Joint and Survivor.
Life with Refund Options
Refund annuities guarantee that the annuitant or beneficiaries will receive at least the amount paid for the annuity.
Types of Refund Options
| Option | How It Works |
|---|---|
| Cash Refund | Beneficiary receives lump sum if annuitant dies before receiving premium back |
| Installment Refund | Beneficiary receives continued payments until premium recovered |
Cash Refund Annuity
| Feature | Description |
|---|---|
| Death benefit | Difference between premium paid and payments received |
| Payment to beneficiary | Lump sum |
| If premium recovered | Nothing to beneficiary |
Example: Cash Refund
Premium paid: $200,000 Monthly payment: $1,200 Annuitant dies after receiving $84,000 (70 months)
Beneficiary receives: $200,000 - $84,000 = $116,000 lump sum
Installment Refund Annuity
| Feature | Description |
|---|---|
| Death benefit | Continued payments until premium recovered |
| Payment to beneficiary | Same monthly amount as annuitant received |
| If premium recovered | Payments stop |
Example: Installment Refund
Same scenario as above: Beneficiary receives: $1,200/month until $116,000 paid (approximately 97 more months)
Comparison of Life Contingent Options
| Option | Payment Level | Beneficiary Guarantee | Best For |
|---|---|---|---|
| Life Only | Highest | None | Maximum income need |
| Life with 10-Year Certain | High | 10 years minimum | Balance of income and protection |
| 100% Joint and Survivor | Lower | Continues to survivor | Married couples (equal income need) |
| 50% Joint and Survivor | Higher | 50% continues to survivor | When survivor needs less income |
| Cash Refund | Lower | Premium recovery (lump sum) | Guarantee return of premium |
| Installment Refund | Lower | Premium recovery (payments) | Continued income for beneficiary |
Key Takeaways
- Life Only provides the highest payments but no beneficiary protection
- Life with Period Certain guarantees payments for a minimum period (5, 10, 15, 20 years)
- Joint and Survivor continues payments to surviving spouse at specified percentage
- Higher survivor percentages mean lower initial payments
- Cash Refund pays beneficiary a lump sum of unrecovered premium
- Installment Refund continues payments until premium is recovered
- All life contingent options guarantee the annuitant cannot outlive their income
Which annuity payout option provides the HIGHEST periodic payment?
An annuitant selects a Life with 10-Year Certain option and dies after 7 years. The beneficiary will receive:
A 100% Joint and Survivor annuity differs from a 50% Joint and Survivor annuity in that 100% Joint and Survivor:
An annuitant purchases a cash refund annuity with $150,000 and receives $60,000 in total payments before death. The beneficiary receives:
16.2 Non-Life Contingent Options
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