CFP

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Insurance Selection and Annuities - Annuities

Definition
An annuity is a periodic or immediate payment to begin at a specific date for a fixed period or for the rest of the policyowner's life. Simply put, an annuity is a vehicle for liquidating a sum of money. Annuities have received a bad reputation in the last few years because of advisors abusing them for high commission payouts. They can however, be a very useful tool in saving for retirement and accomplishing savings goals.

Structure
When individuals select an income option as a death benefit from a life insurance policy, they are actually purchasing an annuity and selecting an annuity payout option. We will look at the most common types of annuities and the premium options to fund these vehicles. The name of the annuity is usually very descriptive of the type and premium option available. For example, single premium immediate annuity (SPIA) is paid by the annuitant in one single premium up front and starts paying out benefits immediately.

Types
There are four common types of annuity's uses; refund, single life, joint and survivor, and period certain.

a. Refund - This payout is designed pay the beneficiary the difference between the purchase price of the annuity and the sum of monthly payments. The two types of refunds available are:

  • Installment - payments continue until full cost is recovered.
  • Cash - remaining lump sum is paid.

b. Single life annuity - Pays the annuitant a guaranteed income for his or her lifetime then ceases upon the annuitant's death.

c. Joint and survivor - If either insured dies the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone.
d. Period certain - Guarantees benefit payments for a certain period of time, such as 10, 15 or 20 years, whether the annuitants is living.

Final Note: The single life annuity will always have the highest income per dollar of outlay. It is not suitable for everyone.

Practice Question:
Which distribution option would be most appropriate for a retired married couple with no other source of income?

A. Joint-and-survivor annuity
B. Single life annuity
C. An interest-only option
D. Joint life annuity

Answer: A
Do not confuse the joint life annuity with the joint-and-survivor annuity. A joint life annuity ceases payments after the death of the first annuitant, whereas, the joint-and-survivor continues to pay benefits until the second annuitant dies. The Premium Method of Annuities

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