When do Benefits Begin with Immediate and Deferred Annuities?

An immediate annuity begins annuity payments within one year after the purchaser contributes all premiums. People commonly use immediate annuities when they wish to convert a large lump-sum amount, such as a substantial distribution from a qualified pension or profit sharing plan, the settlement proceeds of a lawsuit, or simply a sizeable amount of cash, into an immediate income stream.

In contrast, deferred annuities, as the name suggests, delay or defer payments for a period of time (the ‘accumulation phase’) after the purchaser has completed making premiums or contributions. People frequently use deferred annuities when they have cash to invest before retirement and wish to postpone the beginning of the annuity payments until retirement or later.

Number of Lives Covered

The annuity payout period may depend on one or two lives—or less commonly— more lives. A single-life annuity (with no refund feature) makes payments until the single covered life (the sole annuitant) dies. In the case of annuities based on two or more lives, payouts may continue until the last annuitant dies (or more rarely, only until the first annuitant dies, depending upon the exact terms of the contract).

Annuities whose payments continue until the last death of the covered lives are called joint-and-last-survivor annuities, or just joint-and-survivor annuities. Those annuities whose payments cease upon the first death are called joint-life annuities. Currently, joint-and-survivor annuities are much more common than joint-life annuities.

A joint-and-survivor annuity may pay one amount while both annuitants are alive and the same, or another (lesser) amount, after the first death. The surviving annuitant often receives some specified percentage (called the survivor-benefit ratio) of the amount payable before the first death. Survivor-benefit ratios typically range from 50 to 100 percent, with 50 percent, 66 percent, 75 percent, and 100 percent being the most common ratios.

Example. A joint-and-75-percent-survivor annuity paying a $50,000 annual joint benefit would pay $37,500 per year to the survivor after the first death. The amount of the survivor-­benefit ratio generally is selected at the inception of the payout phase (annuitization) of the contract and is generally irrevocable.

The benefit payable to the survivor also may depend on which annuitant dies first. The traditional joint-and-survivor annuity has a principal annuitant and a secondary annuitant or beneficiary. The survivor-benefit ratio applies only to the benefit payable to the surviving secondary annuitant after the principal annuitant’s death. If the principal annuitant outlives the secondary annuitant, the insurer does not reduce the benefit payments. These types of payment structures are particularly common in joint-and survivor-annuity payments from defined-benefit pension plans (where the former employee is the principal annuitant).

In recent years an alternative form of the joint-and-survivor annuity has become popular. This contemporary joint-and-survivor annuity pays the reduced benefit to the survivor regardless of which annuitant dies first. These types of payment structures are most common from commercially available joint-and-survivor annuities. For a given total investment, insurance companies can afford to pay relatively higher joint-and-survivor benefits on these annuities than on traditional joint-and-survivor annuities.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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