Method Of Distributing Proceeds Of Annuities

Straight life annuities. The straight life annuity or life-annuity-no-refund provides an income to the annuitant for his lifetime, regardless of how long that may be. The insurer’s obligation stops at the annuitant’s death even though only a few payments may have been made. Although this form of annuity provides the largest income payment per dollar of purchase price, it is difficult to sell and conducive to misunderstanding because the annuitant’s survivors may feel cheated if the annuitant suffers an early death. Guaranteed minimum annuities. Whereas the straight life annuity provides no benefits to survivors, the guaranteed minimum annuity provides a certain amount of survivor benefits when the annuitant dies at an early age. 

1. The life annuity period certain. This contract provides a guaranteed minimum number of monthly payments to the annuitant or to his survivors, such as 120 or 240. If the annuitant dies early, the payments are continued to his beneficiary for the remainder of the stipulated period. After the guaranteed payment period has passed, the benefits continue only until the annuitant dies. The cost of this contract is obviously higher than that of the straight life annuity. The difference depends upon the age of the annuitant when the benefits begin. 

2. The refund annuity. The installment refund annuity promises to continue the periodic payments after the death of the annuitant until the combined benefits paid to both the annuitant and the beneficiary have equaled the purchase price of the annuity. The cash refund annuity promises to pay the difference between benefits drawn and the purchase price to the beneficiary in cash upon the death of the annuitant. In either case, once the annuitant has collected an amount equal to his purchase price, all survivorship benefits terminate. The cost of these refund annuities is approximately 10 to 15 percent greater than for a straight life annuity, the cash refund annuity being the more expensive. Thus, use of these annuities depends upon the existence of a need to provide for dependents in case of the annuitant’s early death. 

3. The annuity certain. The annuity certain is commonly used as a settlement option under a life insurance policy and provides a given income for a specified number of years independent of the annuitant’s life or death. At the end of the term the payments cease; survival is not a factor. The fixed period and fixed amount options under the life insurance policy are examples of annuity certain contracts.