In an earlier post, we explained how SPIA can be used for retirement planning because they provide guaranteed income and are easy to understand. Insurance companies offer various types of income payment options for SPIA, from which you can choose the scheme that suits your requirements. These payment options vary from one insurance company to another and so you should carefully consider these choices before purchasing an annuity.
Some of the important payment options available are listed below.
Life only annuity
With this option, the insurance company will keep paying money for the rest of the annuitant’s life. But once the annuitant dies, the payment stops immediately and his/her heirs will get nothing from the insurance company. Those who are healthy & anticipate a long retired life (or expect to live for long ) and those who are not keen on leaving their legacy behind, can opt for this type of payment.
Period Certain Only annuity
Here the insurer guarantees the payment of benefits to the annuitant for a designated period of time. If the annuitant dies before this period, then his/her beneficiary will receive the remaining benefits till the end of that period. Monthly payment rate is generally higher in this case than life only annuity as the insurer is aware of the liability he has taken in advance.
Life and Period Certain annuity
Here the insurer pays the benefits until the death of the annuitant OR for a specified number of years, whichever is longer. If the annuitant dies before the specified period then the beneficiary will receive the remaining amount for that period; and if the annuitant continued to live beyond this period, the payment will also continue until his death, upon which it ceases.
Life Only with Guaranteed Minimum option
Just like the life only option, the insurer pays the benefits to the annuitant for the rest of his life. But if the annuitant dies before the repayment of his initial premium amount, then his beneficiaries will get the remaining part of his initial payment.
Some people keep themselves away from SPIAs fearing they may risk their money if they die in near future after purchasing annuity. Such people can purchase annuity with life and period certain option OR life only with guaranteed minimum option.
Joint and Survivor annuity
Here the payment is guaranteed not only until the death of the annuitant but also for the rest of the life of his spouse or someone he/she chooses. This is a good option for those who want to ensure a steady flow of income to his/her spouse (or some other beneficiary) even after their death. The percentage of benefit may be full or a certain fixed percentage such as 75%, 60% or 50% and so on.
Initial payment of premium as well as monthly withdrawal of benefit varies in accordance with the various options stated above; moreover, different insurance companies quote different initial premium amount for these above mentioned options.