A life annuity is a contract with the insurance company, where a seller or the issuer i.e. the life insurance company makes a series of payments to the buyer in the future, in exchange of an immediate lump sum payment or a series of regular payments. The flow of the payment is an unknown duration primarily based on the death of the annuitant. The contract terminates on the death of the annuitant, if there are no beneficiaries following the annuitant, whose name has been mentioned in the contract. Thus life annuity can be termed as longevity insurance.
There are mainly two important phases for life annuity- the accumulation phase and the distribution phase. The accumulation phase is the phase of the customer depositing the money into the account. The distribution phase is the phase where the insurance company makes income payments until the death of the annuitant or annuitants named in the contract. The phases of the annuity can be combined as retirement savings and retirement payment plan. The payments can also be as the annuitant makes a regular contribution to the annuity until a certain period and then starts receiving regular payments from it until death.
Types of Life Annuity
Fixed and Variable annuity – Annuities whose payments are made in a fixed amount are called fixed annuities. Variable annuities on the other hand pay amount that vary according to the investment performance. There are many objectives that can be stated for the use of variable annuity. One recognizable fact is for the motive of tax deferral. Money deposited on the variable annuity grows on the basis of tax deferral. Therefore the taxes are not due until a withdrawn is made. Variable annuities also provide a variety of funds from the various money managers or the investment managements.
There are chances that the annuitant may die before the recovery of the value of the original investment. This possibility of the situation is called forfeiture. This is an undesired situation. In this case the annuitant’s beneficiary continues to receive the amount at regular intervals. The tradeoff that is found between the pure life annuity and the life-with-period certain annuity is that in exchange of the reduced risk of loss, the annuity payments for the latter will be smaller.
Annuity products include joint – life and joint – survivor annuities. In this type the payments cease with the death of one or both the annuitants. In case of an annuity for a married couple payments may cease on the death of the second spouse. In joint-survivor annuity the payment is reduced to the first annuitant with the death of the second spouse.
Impaired Annuity Payments
In case the annuitant’s life expectancy has been reduced due to a severe medical problem the terms for the payment of annuity are improved. This type of annuity is known as impaired annuity. It involves a process of medical underwriting. This type of annuity has developed to a great extent with the growing time.