Annuity Payout Options

When a variable annuity is annuitized, the owner selects a payout option (also called a settlement option). This choice determines how long payments will last and who receives them. Understanding each option and their relative payment amounts is critical for the Series 6 exam.

Core Principle: Risk vs. Reward

Key Rule: The less guarantee provided to the annuitant/beneficiary, the HIGHER the periodic payment. The more guarantee, the LOWER the payment.

Payout Options Overview

Life Only (Straight Life)

How it works: Payments continue for the annuitant's lifetime. When the annuitant dies, payments STOP - nothing goes to beneficiaries.

Characteristics:

• Highest periodic payment of all options
• All risk is on the insurance company (longevity risk)
• No beneficiary protection
• Best for those with no dependents and who want maximum income

Example: Mary, 70, annuitizes with life only option. She receives $1,500/month until she dies. If she lives to 95, she gets 25 years of payments. If she dies after 2 years, payments stop - no remainder to heirs.

Exam Tip: Life only provides the HIGHEST payment because the insurance company keeps all remaining funds if the annuitant dies early.

Life with Period Certain

How it works: Payments continue for the annuitant's lifetime OR a minimum guaranteed period (typically 5, 10, 15, or 20 years) - whichever is LONGER.

Characteristics:

• Lower payment than life only
• Some beneficiary protection during the certain period
• Shorter period certain = higher payment
• Longer period certain = lower payment

Example: John, 70, chooses life with 10-year period certain. He receives $1,350/month. If he dies after 3 years, his beneficiary receives payments for the remaining 7 years. If he lives 15 years, he gets payments for all 15 years.

Payment Hierarchy by Period Certain:

1. Life with 5-year period certain - Higher payment
2. Life with 10-year period certain - Medium payment
3. Life with 20-year period certain - Lower payment

Joint and Survivor

How it works: Payments continue until the LAST of two people (usually spouses) dies. Common variations include:

Characteristics:

• Lowest periodic payment of standard options
• Covers two lifetimes, so insurance company has longer payout obligation
• 100% survivor option pays less than 50% option
• Best for married couples who both need income

Example: Bob and Sue, both 70, choose joint and 100% survivor. They receive $1,100/month. If Bob dies, Sue continues receiving $1,100/month until her death.

Period Certain Only (Fixed Period)

How it works: Payments continue for a specified period regardless of whether the annuitant lives or dies.

Characteristics:

• NOT based on life expectancy
• Beneficiary receives remaining payments if annuitant dies early
• If annuitant outlives the period, payments stop
• No longevity protection

Example: Tom, 70, chooses 15-year period certain. He gets $1,400/month for exactly 15 years. If he dies in year 5, his beneficiary gets 10 more years of payments. But if he lives to 90, payments stopped at age 85.

Payment Amount Comparison

From HIGHEST to LOWEST monthly payment for the same annuity value:

Other Withdrawal Options

Modern annuities often provide alternatives to traditional annuitization:

Systematic Withdrawals

• Take specified amounts periodically
• Maintain control of contract
• Not locked into irrevocable annuitization

Lump Sum

• Withdraw entire value at once
• May trigger large tax bill
• May incur surrender charges if within surrender period

Choosing the Right Option

Key Exam Points

1. Life only = highest payment (no guarantee to beneficiaries)
2. Joint and survivor = lowest payment (covers two lives)
3. Longer period certain = lower payment (more insurance company risk)
4. Annuitization is typically irrevocable - choose carefully!
5. Period certain only has NO longevity protection - payments stop after the period