Buying Insurance

Lesson 5: Annuities

The Parts Of A Deferred Annuity and Payout Choices

Every deferred annuity has two diffferent parts or phases. The first phase occurs during that period when money is being put into the policy and is earning interest (insurance jargon:accumulation phase). This process may go on for many years and money may be deposited monthly, quarterly, semiannually or annually. The second phase occurs when the owner decides to start receiving payments (insurance jargon:dispersal phase). It is at this point that the owner will have a choice to make regarding the amount or the length of time of the payments. If the owner decides to receive payments over a set period of time (insurance jargon:period certain), say twenty years, then that is what will happen and when the time period ends so do the payments. If the owner sets a dollar amount of payment to receive, then the insurance company will calculate how long such payments will continue until the funds are exhausted. With regard to time, the owner may choose a lifetime option which means the insurance company agrees to a guaranteed payment to last as long as the recipient is alive. The owner could choose a joint and survivor payout. This means that a certain amount of money will be paid to the recipient until his or her death, then payouts (usually in a smaller amount) will continue to be paid to a named survivor, usually a spouse, until their death. A final choice for payout is a kind of combination called ten years certain and life. This option means that the insurance company guarantees a payout for at least ten years regardless of whether the recipient lives that long or not. The survivor, say a spouse, will continue to receive the unused portion of the payments for the remainder of the ten year period. Should the initial recipient live beyond the ten year period, then the payments will continue to be made for the lifetime of that individual. As you can see, annuities provide for considerable flexibility in structuring a long term income stream. That is one of their many advantages.

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