Annuities are designed to provide retirement income. Specifically, an annuity is a contract under which an insurer is obligated to make periodic payments to an annuitant for the annuitant’s lifetime, and in some cases, for the purchaser’s spouse. To be considered an annuity under Treasury Regulations, payments must be (1) received on or after the annuity starting date; (2) payable in period installments at regular intervals for at least one full year from the annuity starting date; and (3) determined at the annuity starting date either from the terms of the contract or by the use of mortality tables.
Annuities can be from commercial or private sources. A commercial annuity is generally purchased from an insurance company or a firm that sells annuity contracts. Private annuities come from any other source. For example, a private annuity, would result from a sale of assets, usually by one family member to another, and that family member would promise to pay the person yearly annuity payments. Also, annuities can be “fixed-dollar” annuities or “variable” annuities. Under fixed-dollar annuities, the insurer guarantees both the cash value of the annuity and the fixed interest from year to year. Variable annuities, on the other hand, do not guarantee any particular rate of return.
What happens to your annuity when you die is generally determined by the annuity payment option selected by the annuitant. The simplest type of annuity payment is a straight life payment, which only makes payments for the annuitant’s life. Upon the annuitant’s death, those payments stop, regardless of how few or many premium payments the deceased annuitant had made. Another option available is to use a refund life annuity. These annuities are similar to straight life annuities, but have an added bonus – the insurance company will refund the balance of the payments due under the annuity contract to the annuitant’s beneficiary or estate if the annuitant dies before the premiums paid for the annuity have been returned. This feature is particularly beneficial, as it protects all the money contributed to the annuity during the annuitant’s lifetime. Certain term annuities are similar to refund life annuities, but rather than providing for a lump sum upon the annuitant’s death, the insurance company will make payments for a minimum period of time specified in the contract. Again, this payment option protects the money contributed to the annuity. Finally, joint life and survivorship annuities make payments during the joint lives of two persons, typically spouses. When one of the two spouses dies, payments continue for the life of the survivor.