Annuities
The two phases
An annuity is the opposite of life insurance: it liquidates an estate. During accumulation, the contract builds value (accumulation units in a variable annuity). During annuitization (payout), the value converts into periodic income, often measured in annuity units for variable contracts. Owners may take withdrawals or surrender before annuitization, subject to surrender charges and, for variable contracts, a market value adjustment.
Types
Immediate annuities begin payments within one payment period; deferred annuities accumulate first. Fixed annuities guarantee a declared rate; variable annuities invest in a separate account, shift investment risk to the owner, and are securities requiring a prospectus and registered representative. Indexed annuities credit interest linked to an index with a cap, participation rate, and floor.
Parties
Owner (holds rights), annuitant (whose life measures payments), beneficiary (receives death benefit). If the annuitant dies before annuitization, the owner or beneficiary receives the accumulated value; if the owner dies, the value passes to the beneficiary.
Payout options
Life only (straight life) pays the most, ends at death. Life with period certain guarantees payments for a minimum period. Installment refund and cash refund return the unpaid balance. Joint and survivor continues for the second annuitant, usually at a reduced amount.
Suitability and replacement
Annuities are long-term retirement vehicles; early surrender and 1035 exchanges require suitability review, particularly for seniors.
Trap: questions claiming a life-only payout leaves money to heirs (it does not); questions naming the insured rather than the owner as the party with contract rights. Rule of thumb: more guarantees to survivors = smaller income payment.