Variable Contracts - Types of Annuity Payouts

At the beginning of the payout phase, the investor may receive a lump-sum payment, or may choose to receive the payout as a stream of payments at regular (usually monthly) intervals.

If the investor chooses a stream of payments, he or she will have a number of choices regarding how long the payments will last. Under most annuity contracts, the investor can choose to have the annuity payments last for a period that he or she sets - for example, 10 years - or for an indefinite period, such as lifetime or the lifetime of the client and his or her spouse or other beneficiary.

During the payout phase, the annuity contract may permit your client to choose to receive either payments that are fixed in amount or payments that vary based on the performance of mutual fund investment options. The amount of each periodic payment will depend, in part, on the time period selected for receiving payments.

When the investor decides to annuitize the contract, a specific payment option, which usually cannot be changed in any way, is locked into the annuity. The value of the account can either be drawn in a lump sum or annuitized over the investor's lifetime.

There are several annuity payout options available, distinguished by how long each one pays out its benefits:

  • Life Annuity: This type of annuity payout option usually provides the largest periodic payments, as there are no added options on the contract. The annuitant simply receives periodic payments (monthly, in most cases) over his or her lifetime.

  • Life Annuity with Period Certain: An investor can purchase an annuity that guarantees payment over a certain period of time in addition to lifetime payments. If the annuitant dies before the certain period, the beneficiary will receive payments for the remaining time. If the annuitant dies after the period certain, no payments are made to the beneficiary, but payments will have been made to the annuitant up to the time of death.

For example, a client who purchases a 10-year period certain annuity will have a guarantee from the insurance company: payments will be made for the life of the investor or for a period of 10 years, whichever is greater. If the client dies after three years of payments, the beneficiary will receive the annuity benefits for the remaining seven years. If the investor lives for 16 years after annuitization, he or she will receive 16 years of benefits; the beneficiary, however, will receive nothing.

  • Joint Life with Last Survivor: This type of annuity payout option covers two or more people, usually a husband and wife, and is structured to continue payments to the survivors after the death of the first person. In other words, the annuity will continue to pay benefits as long as one of the annuitants is alive, and it will cease payments upon the death of the last annuitant.

  • Life Contingency: This is simply an annuity with a death benefit attached. The contract stipulates that a full contribution will be made to the account if the owner dies during the accumulation phase. The beneficiary, in turn, receives the full payout amount of the annuity.

Exam Tips and Tricks
Make sure you know the various types of annuity payouts and the differences between them. You will probably be asked to match an annuity to an investor\'s needs or to identify the annuity based on particular characteristics.

Annuity Distributions and Variable Annuity Charges
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