Typology of Individual Annuities
Annuities can be categorized along many dimensions, including the number and timing of premiums, the number of lives covered, the nature of the payouts, and the date at which gains begin. There are several methods of paying premiums: single premium, fixed annual premium, and flexible premium annuities are all available. Annuities can ensure a single life, or they can ensure multiple lives (joint life annuities). They can begin payouts immediately after the premium is paid (immediate annuities), or after some waiting period, sometimes involving many years (deferred annuities). The payouts may take the form of a life annuity without refund, they may offer a guaranteed minimum payout, or they may offer the annuitant a flexible structure of periodic withdrawals.
The simplest individual annuity contract is a single-premium immediate annuity. In return for a single premium payment, the annuitant receives a guaranteed stream of future payments that begin immediately. These payments can end when the annuitant dies (a simple life annuity), when both the annuitant and a co-annuitant, such as a spouse, have died (a joint life survivorship annuity), or at the later of a fixed number of years or the date of death of the annuitant (life annuity with stipulated payments certain).
These different annuities address different insurance needs. A simple life annuity is primarily designed to ensure annuitants against out-living their resources; a joint life survivorship annuity addresses this risk and also provides retirement income for dependents. The “payout certain” annuity is often attractive because potential annuitants are unwilling to turn over a capital sum to an annuity provider and risk dying shortly after that without receiving many annuity payments. The “fixed payments certain” product overcomes this inhibition by ensuring that payments will be made to the annuitants’ beneficiaries for at least a fixed period. The level of the annuity payout associated with a “fixed payments certain” contract is lower than that for a simple life annuity.
In addition to the immediate annuities described above, there are also deferred annuities. A single-premium deferred annuity, for example, includes a waiting period between the premium payment and the beginning of annuity payouts. The promised stream of payments for a given premium is more significant for a single-premium deferred annuity than for a single-premium immediate annuity since the premium is invested and earns returns between the date when it is paid and the date when the payouts begin. A variant on such an annuity, one that provides for multiple premium payments, could represent a saving plan for an individual who plans to use an annuity to draw down accumulated resources. This is known as an annual-payment annuity. It specifies a stream of premiums that the policyholder will pay during the policy’s accumulation phase. At the conclusion of this phase or possibly some years afterwards, the policy enters its liquidation phase, and the annuitant and beneficiaries begin to receive payouts from the accumulated principal. While these products are available, single-premium deferred annuities have been the dominant contract in the individual annuity market for the last few decades.