Type of Annuities in Life Insurance

Annuities

Annuities are often described as the ‘reverse’ of life insurance; under a life insurance contract the insurer starts paying upon the death of the insured, but under an annuity contract the insurer usually stops paying upon the death of the annuitant.

Annuities are bought from life insurance companies. They may be purchased by a single lump sum payment or by a series of regular contributions spread over, possibly, many years. Payment may be made by the person who is to be the annuitant or another annuity purchaser such as the annuitant’s employer, other personal benefactor or a pension scheme.

An annuity is a series of regular payments from an annuity provider to an individual, referred to as the annuitant.

Annuities can be either immediate or deferred annuities:

• Immediate annuities vest (become payable) immediately after they have been purchased with a lump sum. The annuity payments commence at the end of the month, quarter, half-year or year as per the features of the policy/option exercised by the policyholder.

• Deferred annuities are paid for in advance. The annuity purchase price may be a lump sum paid at commencement before the annuity is due to vest (be paid). Alternatively, deferred annuities may be bought by paying instalments over a series of years before vesting date.

Life annuity

As the name suggests, in this type of annuity the annuitant keeps receiving annuity payments from the insurance company throughout their lifetime. The annuity payments cease on their death.

For example, if Sanjay buys a life annuity plan then he will keep getting regular annuity payments from the insurance company until he dies.

Be aware

Life annuities (immediate and deferred) are often bought with money that is tied to pension purchase and which cannot be used for any other purpose (see section B6 below on pension plans for more detail).

Guaranteed period annuity

In this type of annuity the annuitant can choose to receive the annuity payment for a minimum fixed number of years such as 5, 10, 15, and 20 or 25 years regardless of whether the annuitant is still alive. If the annuitant dies during the selected term, annuity instalments for the remaining part of the selected term will be paid to the beneficiaries. If the annuitant is still alive after the guaranteed period has elapsed the payments are continued until his death.

Joint life, last survivor annuity

In this type of annuity there are usually two annuitants, e.g. husband and wife. After the first death, regardless of who dies first, the remaining spouse continues to receive the same level of annuity payment throughout their lifetime, i.e. 100% of the level paid whilst they were both alive.

Another variant of this type of annuity is when the annuitant gets annuity payments during their lifetime, and after the death of their spouse (for example) gets annuity payments at a reduced percentage during their lifetime, e.g. 25%, 50% or 75% of the original amount of annuity. With this type of annuity the payments are made at the 100% level as long as the first named annuitant is still alive. If on their death the first named annuitant’s spouse is still alive, they will receive the reduced percentage, as stated in the policy, until they die.

Life annuity with return of purchase price

In this type of annuity the annuitant receives regular annuity payments during their lifetime. On their death, the original purchase price is returned to the nominee/beneficiary. The purchase price refers to the value of the investment at the end of the accumulation phase (with which the annuity was purchased) or the lump sum amount paid at the time of purchasing the annuity, depending on the circumstances.

Increasing annuity

With this type of annuity the terms can be similar to any of the above, but the annuity increases every year by a fixed percentage or in line with an agreed inflation index.

Anand Khemka
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