Non-Life Contingent Options
Non-life contingent payout options do not depend on the annuitant's survival. These options guarantee a specific payout regardless of how long the annuitant lives.
Period Certain Only
A Period Certain Only option pays for a specified number of years, regardless of whether the annuitant lives or dies.
How Period Certain Only Works
| Feature | Description |
|---|---|
| Payments | Continue for specified period only |
| At period end | Payments stop, regardless of annuitant's status |
| If annuitant dies early | Remaining payments go to beneficiary |
| If annuitant lives beyond period | No more payments |
Common Period Certain Options
| Period | Description |
|---|---|
| 5-Year Certain Only | 60 guaranteed payments |
| 10-Year Certain Only | 120 guaranteed payments |
| 15-Year Certain Only | 180 guaranteed payments |
| 20-Year Certain Only | 240 guaranteed payments |
Period Certain Only vs. Life with Period Certain
| Feature | Period Certain Only | Life with Period Certain |
|---|---|---|
| Payments after period ends | Stop | Continue for life |
| Longevity protection | No | Yes |
| Payment amount | Higher | Lower |
| Risk of outliving income | Yes | No |
Example: 10-Year Certain Only
| Annuitant Status | Payment Effect |
|---|---|
| Dies after 6 years | Beneficiary receives 4 more years of payments |
| Alive after 10 years | Payments stop—no more income |
| Lives to age 95 | No payments after year 10 |
Exam Tip: Period Certain ONLY does NOT provide lifetime income. If the annuitant outlives the period, they have no more income from the annuity. This is a key distinction from Life with Period Certain.
Fixed Amount
With a Fixed Amount option, the owner specifies a dollar amount to receive each period, and payments continue until the account is exhausted.
How Fixed Amount Works
| Feature | Description |
|---|---|
| Payment amount | Owner chooses the dollar amount |
| Duration | Until account value is depleted |
| Flexibility | May allow adjustment of amount |
| Risk | May run out of money if amounts are too high |
Example: Fixed Amount
Account value: $240,000 Chosen payment: $2,000/month
| Calculation | Result |
|---|---|
| Without interest | 120 months (10 years) |
| With interest earnings | Longer than 10 years |
Fixed Amount Considerations
Advantages:
- Predictable income amount
- Control over payment size
- May be able to adjust
Disadvantages:
- Can outlive the payments
- No guaranteed lifetime income
- Must balance income needs with longevity
Fixed Period
With a Fixed Period option, the owner specifies a time period, and the insurer calculates the payment amount that will exhaust the account over that period.
How Fixed Period Works
| Feature | Description |
|---|---|
| Payment period | Owner chooses number of years |
| Payment amount | Calculated to exhaust account over the period |
| Interest | Factors into calculation |
| Risk | No payments after period ends |
Example: Fixed Period
Account value: $240,000 Chosen period: 15 years (180 months)
| Factor | Impact |
|---|---|
| Without interest | $1,333/month |
| With 4% interest | Higher payment due to continued earnings |
Fixed Period Considerations
Advantages:
- Guaranteed income for specified time
- Payments may be higher than life options
- Predictable duration
Disadvantages:
- No lifetime income guarantee
- May outlive the period
- Must plan for income after period ends
Systematic Withdrawals
Systematic withdrawals are not technically an annuitization option, but a way to receive income while maintaining control of the contract.
How Systematic Withdrawals Work
| Feature | Description |
|---|---|
| Contract status | Remains in accumulation phase |
| Ownership | Owner retains full ownership and control |
| Payment flexibility | Can change or stop withdrawals |
| Tax treatment | LIFO—earnings taxed first |
| Death benefit | Remaining balance goes to beneficiary |
Systematic Withdrawals vs. Annuitization
| Feature | Systematic Withdrawals | Annuitization |
|---|---|---|
| Control | Full control retained | Irrevocable |
| Flexibility | Can change amounts | Fixed payments |
| Death benefit | Account balance | Depends on option |
| Lifetime guarantee | No | Yes (life options) |
| Tax treatment | LIFO (gains first) | Exclusion ratio |
Advantages of Systematic Withdrawals
- Flexibility to change withdrawal amounts
- Maintain ownership and control
- Death benefit preserved
- Can stop withdrawals if needed
- Access to account value for emergencies
Disadvantages of Systematic Withdrawals
- No guaranteed lifetime income
- Risk of depleting account
- Must self-manage longevity risk
- Earnings taxed first (less favorable than exclusion ratio)
Lump Sum
A Lump Sum distribution takes the entire account value at once rather than as periodic payments.
Lump Sum Considerations
| Consideration | Description |
|---|---|
| Full access | Receive entire balance immediately |
| Taxation | All deferred earnings taxed as ordinary income in year received |
| Tax bracket | May push into higher tax bracket |
| No annuity benefits | Loses longevity protection and death benefits |
When Lump Sum May Be Appropriate
| Situation | Reason |
|---|---|
| Medical emergency | Need immediate access to funds |
| Debt payoff | Eliminate high-interest debt |
| Investment opportunity | Better use of funds elsewhere |
| Terminal illness | Short life expectancy |
| Small account balance | Not enough to provide meaningful income |
Comparison of Non-Life Contingent Options
| Option | Payment Duration | Flexibility | Longevity Protection |
|---|---|---|---|
| Period Certain Only | Fixed years | Low | No |
| Fixed Amount | Until depleted | Moderate | No |
| Fixed Period | Fixed years | Low | No |
| Systematic Withdrawals | Until depleted | High | No |
| Lump Sum | Immediate | Full | No |
Key Takeaways
- Period Certain Only pays for a fixed period but provides no lifetime income
- Fixed Amount lets owner choose payment size; duration depends on account balance
- Fixed Period lets owner choose duration; payment amount is calculated
- Systematic Withdrawals provide flexibility but are not true annuitization
- Lump Sum provides full access but triggers immediate taxation
- Non-life contingent options do NOT protect against longevity risk
- Choose based on need for flexibility, income predictability, and longevity concerns
A Period Certain Only annuity payout option:
The main advantage of systematic withdrawals over annuitization is:
With a Fixed Period payout option:
Taking a lump sum distribution from a deferred annuity will result in:
16.3 Annuity Taxation
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