Annuities

An annuity is a contract that guarantees to provide you with periodic income payments for your lifetime, for a fixed period of time, or both. Annuities may be purchased with a single lump sum of money, with fixed periodic premium payments, or with premium payments made at your discretion. Periodic income payments may begin almost immediately (called an immediate annuity) or may be deferred until a specified time (called a deferred annuity). The person who receives income payments under an annuity is called the annuitant.

Types of Annuities

Immediate Annuities

Immediate annuities are purchased with a single lump sum of money (premium). Income payments begin within one payment interval from the date the premium was paid. For example, if you are to receive annual payments under the annuity contract, you will receive your first periodic income payment one year after paying the premium. The following are common types of immediate annuities:

• Joint and last-survivor annuities provide periodic income payments for as long as any of the people insured under the contract are alive. These annuities are commonly used in husband and wife relationships.
• Life income annuities are also called straight life annuities and provide periodic income payments for as long as the annuitant lives and terminate on the annuitant’s death. This type of annuity provides the largest payment of all the immediate annuities, because no matter how few income payments have been made when the annuitant dies, no refund of the premium is made.
• Installment refund annuities provide a periodic income payment for as long as the annuitant lives and then continue payments to the annuitant’s beneficiary after the annuitant’s death until the total of all income payments made equals the premium.
• Cash refund annuities provide a periodic income payment for as long as the annuitant lives. Upon the death of the annuitant, they provide a lump sum payment to the beneficiary equal to the difference between the premium and the total of all income payments made prior to the annuitant’s death.
• Certain and life annuities provide a periodic income payment for as long as the annuitant lives or for a specified (certain) period of time, whichever is longer. The certain periods are usually 5, 10, 15, or 20 years. The longer the certain period, the lower the periodic income payments.

Deferred Annuities

Deferred annuities may be purchased with a single premium or with periodic or flexible premiums. Periodic income payments begin at a specified date, often age 65. The period between the purchase date and the date the income payments begin is called the deferral period or accumulation period. During this period the insurance company treats your premium payments much like deposits to a savings account. Premium payments are reduced for expenses and any withdrawals you may make and are credited at an interest rate declared by the insurance company. The balance in the account is called the account value. At the end of the accumulation period, the insurance company purchases an immediate annuity using the account value less any expense charges. A deferred annuity contract provides a guarantee that a minimum income payment per dollar of account value will be paid.