When you purchase an immediate annuity, or have your deferred annuity mature, the annuity provider requires that you select a settlement option. This settlement option determines what happens to your annuity funds if you die in the payout phase. The selected option also determines the amount of your annuity income. Clearly, you should not select your annuity option on a whim. It is important to use the settlement option that is most appropriate to your situation- financial and otherwise.
The role of annuities in estate planning is important. In choosing an annuity settlement option, you need to determine whether you have dependents, how long those dependents will remain dependent and if you will be comfortable with the amount that your beneficiary would receive. You should also note the amount of annuity income you will receive, since the selected settlement option affects this.
There are four basic settlement options available to annuitants: straight life, straight life with period certain, straight life with refund option and joint and last survivor option. Knowing what the options offer, and the circumstances under which you should choose each option, can help you make the choice most appropriate to your situation.
Straight life option
The straight life option offers the highest annuity income for as long as the annuitant lives. However, once the annuitant passes away, the annuity provider has no further obligation with that annuity contract. This suggests that your dependents or estate receive nothing under this option. Therefore, when choosing the straight life option, you must ensure that you either have no dependents or that other aspects of your estate plan cater for them. This option is best for those who have no obligations and stand to benefit from receiving the higher annuity income.
Straight life option with period certain
The straight life option with period certain is appropriate if you have temporary dependents, who will be able to survive independently after the guaranteed period is over. The annuity income is lower than that of the straight life option but the annuitant will receive lifetime income even after the guaranteed period is over. This option is useful if you want to balance estate needs but keep the lifetime income benefit.
Straight life option with refund option
The refund option offers lifetime income in addition to a possible refund of the difference between the annuity’s purchase price and the accumulated annuity income disbursed to the annuitant. This option is particularly useful when you purchase an immediate annuity, where the purchase price is equivalent to the lump sum invested. Your beneficiary will only receive nothing if the annuity income you received exceeded the purchase price.
Joint and last survivor
The joint and last survivor option is good if the annuitant has a dependent for more than the period certain- particularly if it is a dependent spouse. The joint and last survivor option covers the lifetimes of two parties- the annuitant and contingent beneficiary. This makes it the lowest paying option as well, but it offers greater security for the contingent beneficiary. It is particularly useful when the contingent beneficiary is a retired spouse.
Choosing your annuity settlement option involves careful consideration. The right settlement option can work for you, without compromising your estate plan or the financial security of dependents.