Typology of Individual Annuities

Annuities can be classified in a variety of ways, including the quantity and timing of premium payments, the number of lives covered, the form of the payouts and the date gains begin. Premiums can be paid in various ways: single premium set yearly premium or variable premium annuities. Annuities can guarantee a single-life or numerous lifetimes (joint life annuities).

They can begin payouts immediately after the premium is paid (immediate annuities) or after some waiting period, sometimes involving many years (deferred annuities). The payouts may take the form of a life annuity without refund, they may offer a guaranteed minimum payout, or they may offer the annuitant a flexible structure of periodic withdrawals.

A single-premium instant annuity is the simplest type of individual annuity contract. The annuitant receives a guaranteed stream of future payments in exchange for a single premium payment. These payments can terminate when the annuitant dies (a simple life annuity), when both the annuitant and a co-annuitant, such as a spouse, die (a joint-life survivorship annuity), or at the end of a certain number of years or on the annuitant’s death (a joint-life survivorship annuity) (life annuity with stipulated payments certain).

These various annuities are designed to meet a variety of insurance needs. A simple life annuity is intended to protect annuitants from outliving their assets; a joint-life survivorship annuity tackles this risk while also providing retirement income for dependents. The “payout assured” annuity is frequently tempting because prospective annuitants are afraid to pay a capital sum to an annuity provider and risk dying without receiving numerous annuity payments. The “certain fixed payments” product addresses this impediment by insuring that annuitants’ beneficiaries will receive payments for at least a specific time. The annuity payout level connected with a “fixed payments certain” contract is lower than the payout level associated with a basic life annuity.

In addition to the immediate annuities described above, there are also deferred annuities. A single-premium deferred annuity, for example, includes a waiting period between the premium payment and the beginning of annuity payouts. The promised stream of payments for a given premium is more significant for a single-premium deferred annuity than for a single-premium immediate annuity since the premium is invested and earns returns between the date when it is paid and the date when the payouts begin.

A variant on such an annuity, one that provides for multiple premium payments, could represent a saving plan for an individual who plans to use an annuity to draw down accumulated resources. This is known as an annual payment annuity. It specifies a stream of premiums that the policyholder will pay during the policy’s accumulation phase.

After this phase or possibly some years afterwards, the policy enters its liquidation phase, and the annuitant and beneficiaries begin to receive payouts from the accumulated principal. While these products are available, single-premium deferred annuities have been the dominant contract in the individual annuity market for decades.

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