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Annuity Payment Options
Upon immediate
annuitization, a wide variety of options are available in the way
the stream of payments is paid. If it is paid over the life of the
annuitant (the person receiving the annuity payments), it would
commonly be called a life annuity, but also known as a
life-contingent annuity or simply lifetime annuity. If the annuity
is paid over a fixed period it is known as an "annuity with period
certain". The payments can also be paid over the lifetime of the
annuitant(s) or for a fixed period, whichever is longer. This is
known as "life with period certain".
A hybrid of these is when the payments stop at death, but also after
a predetermined number of payments, if this is earlier: known as a
temporary life annuity. The difference with the period certain
annuity is that the period certain annuity will keep paying after
the death of the annuitant until the period is completed.
Life annuities
A life or lifetime immediate annuity is most often used to provide
an income in old age, i.e. a pension. This type of annuity may be
purchased from an insurance company.
This annuity works somewhat like a loan that is made by the
purchaser to the issuing company, who then pay back the original
capital with interest to the annuitant on whose life the annuity is
based. The assumed period of the loan is based on the life
expectancy of the annuitant. In order to guarantee that the income
continues for life, the investment relies on cross-subsidy. Because
an annuity population can be expected to have a distribution of
lifespans around the population's mean (average) age, those dying
earlier will support those living longer.
Cross-Subsidy remains one of the most effective ways of spreading a
given amount of capital and investment return over a life time
without the risk of funds running out.
Life annuity variants
At a cost to the payments, an annuity can be purchased with addition
of another life such as a spouse on whose life the annuity is wholly
or partly guaranteed. For example, it is common to buy an annuity
which will continue to pay out to the spouse of the annuitant after
death, for as long as the spouse survives. The annuity paid to the
spouse is called a reversionary annuity.
Other features such as a minimum guaranteed payment period
irrespective of death, known as period certain, or escalation where
the payment rises by inflation or a fixed rate annually can also be
purchased.
Life with period certain annuities are more palatable to people who
have accumulated money and would not like to lose all of it if they
were to die soon after annuitization. At least the period certain
payments will be made to their beneficiary.
Impaired life annuities for smokers or those with a particular
illness are also available from some insurance companies. Since the
life expectancy is reduced, the payment for the purchaser is raised.
Deferred Annuties
In the case of a deferred annuity there are two phases of the
annuity. The accumulation phase is the time between initial purchase
and annuitization. When the annuity is turned into a stream of
payments, academically it is known as the annuitization phase.
Before annuitization, additional purchase payments, known as
premiums may be made. In a deferred annuity, the goal is to invest
the premium payments in either guaranteed accounts or variable
accounts and earn investment returns. These returns can then be
withdrawn when desired based on the features of the contract.
A wide variety of features have been developed by annuity companies
in order to make their products more attractive. These include death
benefit options and living benefit options.
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