What Is a Life Option?

The life option is one example of a payout scheme for an annuity contract. It guarantees periodic payments to the annuitant for the remainder of their life. Since that timeline is, by definition, unknown, the life option involves some financial risk for both the annuitant and the insurance company making those payments.

Key Takeaways

  • Annuities are financial products that allow investors to enjoy tax-deferred growth on money—either periodic or lump-sum payments—and then annuitize the plan during retirement.
  • The appeal of annuities is the certainty of the payouts, regardless of what payout structure the annuitant chooses.
  • A life option is a payout method for an annuity that guarantees periodic payments for life.
  • The joint-life option continues paying the spouse if the annuitant passes away.

How a Life Option Works

A life option is one of several payout schedules available to the owner of an annuity contract. Annuities are insurance products that investors typically purchase to provide a post-retirement income stream. The investor contributes to the annuity periodically or in a lump-sum contribution, then enjoys tax-deferred growth on that investment. The appeal of annuities lies in the certainty of the payouts, regardless of which type of payout structure the annuitant selects.

Among these payout plans, the life option is unique in that the length of the payout period is unknown. The investor will receive payments until they die. Unlike the payout period, the payout amount is known. This means that an annuitant who chooses the life option for payouts will earn more from their investment if they live long enough for their payouts to exceed their contributions to the policy.

Other options for annuity payouts tend to either emphasize a fixed period or fixed total amount of payouts. A fixed period contract can be useful for an investor who expects payouts from another retirement product to kick in at a later date and assures payment to a beneficiary if the investor passes away prior to the period’s end. On the other hand, a fixed amount contract can be risky if this is the only source of retirement income, and the annuity value is exhausted before the investor dies. Finally, an annuitant can elect a lump-sum payout, but this amount will generally be less than expected annuitized payments and may trigger tax liabilities that would otherwise not be a concern.

Joint-Life vs. Life Option

A joint-life payout plan allows for annuitized payouts to continue beyond the death of the annuitant and until their spouse passes away. This can be a smart choice for couples in which one spouse has not built up a sufficient retirement reserve.

A variation of the joint-life payout plan is the life with period certain option, under which payments continue after the annuitant’s death but at a lower dollar amount and for a limited period for the spouse or beneficiary. Lastly, an installment-refund payout scheme guarantees payments until the death of the annuitant, followed by a lump-sum payment to a beneficiary of any remaining assets.

In all of these cases, greater payouts come at a cost. Guaranteed spouse or beneficiary benefits will require higher premiums.