Types Of Annuities

An annuity is a stream of regular monthly payments for life. Depending on the type of annuity, your spouse could continue to receive payments following your death, at least for a certain period of time.

Insurance companies sell several kinds of annuities, and the terminology can be confusing. The following are the kind of annuities that are designed for retirees to receive income. These are sometimes called immediate annuities, life annuities, or income annuities. These are purchased with a one-time total payment (lump sum) at the time you want to begin receiving a guaranteed stream of lifetime income.

Life Annuity

A life annuity usually pays you the same benefit each month for as long as you live. A few insurers sell annuities that have automatic annual increases based on a formula or the rate of inflation.

Joint and Survivor Annuity 

A joint and survivor annuity is payable to you for life. If you pass away, a percentage of the annuity payment will continue to be paid to your surviving spouse or beneficiary for the rest of his or her life. Under this option, you will receive a lower benefit because the annuity has to allow for continued benefits to your survivor.

Example of a Joint and Survivor Annuity

Janet can retire at age 65. Under a life annuity, she would receive $1,000 a month that would end when she dies. Janet's husband John is 67. She chooses to provide him with 50 percent of her benefit after she dies. In this case, her plan will pay her $900 a month during her lifetime. After her death, John will receive $450 a month for the rest of his life. This is typically known as a 50 percent joint and survivor annuity.

Guaranteed Payments Life Annuity 

A life annuity with payments guaranteed for a fixed period of time provides you with income for the rest of your life; however, if you die before receiving payments for a specified period of time, say five or ten years, benefits will continue to be paid to your beneficiaries or your estate for the rest of that period of time.

Example of a Life Annuity With Payments Guaranteed for Five Years

Alan is planning to retire at age 67. His standard benefit is $2,000 a month payable in the form of a life annuity with payments guaranteed for five years. If Alan dies after two years, at age 69, his wife Jackie will continue to receive benefit payments for another three years. However, if Alan lives beyond the guaranteed five years-to age 72 in this case, Jackie will not receive further benefit payments when Alan dies.

Pop-up Joint and Survivor Annuity 

A "pop-up" joint and survivor annuity benefit, while not common, is available from some insurers and from some pension plans. Here is how it works:

If you are receiving a qualified joint and survivor annuity, and your spouse to whom you were married at your benefit commencement date dies while you are still alive, your monthly benefit will be adjusted. Your new benefit will change to the amount you would have received under a single life annuity (provided you comply with Plan procedures). This is why it is called the "Pop-Up Benefit"-it pops up after your spouse dies, restoring to you a higher monthly benefit amount.

With this type of annuity, the plan would pay a smaller initial monthly benefit than under the typical joint and survivor annuity because it gives the employee the added benefit of a "pop-up" to a higher monthly payment upon the spouse's death.

If you choose someone other than your spouse as your beneficiary, the Pop-Up Benefit does not apply. If your beneficiary dies after you commence receiving benefits, your payments will remain unchanged.