Life With Period Certain
This structure guarantees a lifetime payment, but the period certain part of the contract provides a minimum payout amount if you die early.
For example, a “life with 10-year certain” structure guarantees a lifetime payment regardless of how long you live. But if you died in year two, then there would be eight more years of payments to your listed beneficiaries. If you lived 11 years, then the income stream would obviously continue for your life (or lives, if joint), but no money would go to your beneficiaries.
Life With Installment Refund
This choice provides the highest lifetime income guarantee while making sure that 100% of the initial premium will go to you or your listed policy beneficiaries. If you die early in the contract, all of the unused money will be paid out to your beneficiaries in payment form until the funds in the account are exhausted.
Life With Cash Refund
This is similar to the “life with installment refund” structure, but instead of the unused portion being paid to your beneficiaries in payment form, it is distributed as a lump sum. The annuity carrier doesn’t keep a penny with either the installment refund or cash refund structures.
This will provide the highest payout because you are shouldering all of the risk. The annuity company is on the hook to pay you for as long as you live, but when you die, the money is gone.
Most people mistakenly believe that this income structure is the way all annuity payouts work. This is untrue, but it is a common misbelief. If you don’t have a spouse, kids, pets or a charity of choice, then this would be your choice. However, most people don’t choose this payout option because they want their beneficiaries to get any unused portion of the initial premium.
Even though the true value of a longevity annuity is when you add the life contingency as a way to transfer the risk, you could choose to structure the payout for just a specific period of time.
For example, if you structured the policy “20-year certain,” then the income stream would be paid out for 20 years only to you or your listed beneficiary, even if you died during that time period. After the 20th year, there would be no more income payments.