An annuity is a series of equal-sized payments that are made on a constant basis during a fixed period of time. Payments can be made at the end of the period, called an "ordinary annuity," or at the beginning of the period, called "annuity due." Learning how to compute the future value of an annuity is very helpful when planning your financial future.
Instructions
# Write down the formula. The formula for the future value of an ordinary annuity is: FV(OA) = PMT [((1 + i)n - 1) / i].
# Determine the payment. The payment is the amount that you receive or pay into the annuity the annuity each period. For example, if you were receiving $1,000 a month from rental income, your payment would be $1,000. If you were paying $500 a month into an investment, your payment would be $500. The payment amount is plugged into the (PMT) spot of the formula.
# Determine the number of periods. The number of periods is equal to the amount of payments you intend to collect or make. For example, if you plan to pay $50 a week for 15 years into an annuity, your number of periods would equal 750 (52 weeks --- 15 years = 750.) Plug the number of periods into the (n) spot in the formula.
# Determine the annual interest rate. The interest is stated as a percentage and is the rate at which your money will be growing.
# Calculate the (i) in the formula. Divide the annual interest rate from step 4 by how many periods it will compound during one year. For example, if the annual interest rate is 15 percent and you make 12 payments a year, (i) will equal .0125 (.15/12 =.0125.) This equals the interest rate per period. Plug the rate into each (i) spot in the formula.
# Solve the formula. The result is the total future value of the ordinary annuity. For example, if the PMT=$100, n=120 and i=.005 then the future value would equal $16,387.93.
Tips & Warnings
* Make sure you follow the order of operations. If not, you will end up with a wrong calculation.
* When calculating (i), remember to divide the annual interest rate by the total number of periods within one year.
Thursday, June 23, 2011
Wednesday, June 22, 2011
Annuities and Structured Settlements - Are They the Same Thing?
A lot of people are not really clear on the differences between annuities and structured settlements. Maybe it is because they have some similarities in the way that they perform in that in most cases they provide a monthly or yearly set amount of income. After that, the similarities pretty much end.
Some very basic information about this subject is given below, and while not meant to be all encompassing it should be sufficient enough to provide a general outline of the differences between the two.
* An Annuity is a financial instrument designed and often provided by an insurance or investment company to give an investor a set and sometimes somewhat guaranteed rate of return on that investment. Insurance companies provide a type of insurance that is often called "variable life" or some variable on that term that not only gives the purchaser a set amount of coverage on their life should they die, but also builds up a nest egg for them that after a set amount of time the purchaser can then start to draw against and provide them a monthly or yearly income.
* A Structured Settlement is something that is usually awarded to an individual by a court of law after a lawsuit following an accident whether it be an automotive accident that caused serious injuries, an injury suffered in the workplace, or other situation where an individual was caused physical harm due to neglect or the actions of another person, company, or business. These cases can vary from the things mentioned above to things such as product liability cases, where someone is harmed by defective manufacturing and faulty products, to health care related injuries caused by an inattentive surgeon or medical doctor. Most people are familiar with the word "malpractice". That term gets used a lot in the health care field.
So while both an annuity and a structured settlement can and often do provide a set amount of income to an individual, the reasons for the pay out are quite different.
Some very basic information about this subject is given below, and while not meant to be all encompassing it should be sufficient enough to provide a general outline of the differences between the two.
* An Annuity is a financial instrument designed and often provided by an insurance or investment company to give an investor a set and sometimes somewhat guaranteed rate of return on that investment. Insurance companies provide a type of insurance that is often called "variable life" or some variable on that term that not only gives the purchaser a set amount of coverage on their life should they die, but also builds up a nest egg for them that after a set amount of time the purchaser can then start to draw against and provide them a monthly or yearly income.
* A Structured Settlement is something that is usually awarded to an individual by a court of law after a lawsuit following an accident whether it be an automotive accident that caused serious injuries, an injury suffered in the workplace, or other situation where an individual was caused physical harm due to neglect or the actions of another person, company, or business. These cases can vary from the things mentioned above to things such as product liability cases, where someone is harmed by defective manufacturing and faulty products, to health care related injuries caused by an inattentive surgeon or medical doctor. Most people are familiar with the word "malpractice". That term gets used a lot in the health care field.
So while both an annuity and a structured settlement can and often do provide a set amount of income to an individual, the reasons for the pay out are quite different.
Tuesday, June 21, 2011
Annuity Settlement Options: Annuitize or Lump Sum?
Annuity settlement options can be puzzling. Many people have purchased annuities of all types for the tax deferral feature. For many retirees the time has come to make the shift from accumulation to payout. Here are some considerations to help determine what’s best for you.
The most popular annuity settlement option is annuitization – to take payments over a time frame that you select, which may include the rest of your life. When you annuitize, you receive payments (monthly, semi-annually, annually) in exchange for surrendering your annuity to the annuity insurance company. Your annuitization options usually include:
Lifetime Income
Period Certain
Period Certain Plus Life
Here is how Lifetime Income works. Let’s say you have $100,000 in an annuity and the insurance company calculates that, due to your age and gender, it will pay you $1,500 a month for as long as you live. You collect $1,500 the first month, $1,500 the next month, and $1,500 the following month. Then you get run over by a truck and die. You bet the insurance company you would outlive your $100,000 and you lost. $4,500 is all you get; they keep the rest. This is maybe not such a good deal.
Your second option is called Period Certain. This means you can take your money out over a period of 5, 10, 15, or 20 years. The insurance company guarantees to pay out all your money (plus interest) over that period. If you do not live to the end of the period, your beneficiary gets the remaining money in your annuity over the balance of the period. Live or die, you or somebody else gets back all your money.
The third option is Period Certain Plus Life. Here the insurance company guarantees to pay you a check each month for a certain period of time, plus, if you live beyond that period (even if you live to be 150 years old) you’ll receive monthly income that you cannot outlive.
The choices are not so simple. A monk in a monastery, for example, may well expect to live to a ripe old age and do better with a Lifetime Income (Although I wonder what he would spend the money on). Someone with a terminal illness may want to take a lump-sum settlement or a 5-year Period Certain. Take a close look at factors such as your health and spouse’s health, your age and spouse’s age, other sources of income, and your tax bracket.
For more flexibility you could opt for Systematic Withdrawals. In this case, you would receive a fixed percentage of the account value or a fixed monthly amount. You could stop this arrangement at any time and simply withdraw your remaining balance.
Although Systematic Withdrawals appear to have advantages over annuitization, note these two differences: With annuitization as your annuity settlement option, you can lock in a guaranteed monthly income regardless of the performance of your annuity. In addition, annuitization lengthens the tax deferral period since only part of each payment is taxed. The IRS considers the other part of your payments a return of principal.
Finally, you may want to just keep the annuity growing and not take payments at all. Some annuities, however, do not allow this and force withdrawals by a certain age. One option for you is a tax-free exchange to another annuity that may have more liberal withdrawal requirements, but watch out for surrender charges on your existing policy.
You probably never thought getting a check could be so complicated. It’s really not as messy as it sounds. In fact, I have annuity agents all across America who specialize in solving such problems. There is no charge or obligation. To have your choices compared, we would be happy to review any type of annuity settlement option and figure the most appropriate withdrawal option for you. Just click on the link in my bio below.
The most popular annuity settlement option is annuitization – to take payments over a time frame that you select, which may include the rest of your life. When you annuitize, you receive payments (monthly, semi-annually, annually) in exchange for surrendering your annuity to the annuity insurance company. Your annuitization options usually include:
Lifetime Income
Period Certain
Period Certain Plus Life
Here is how Lifetime Income works. Let’s say you have $100,000 in an annuity and the insurance company calculates that, due to your age and gender, it will pay you $1,500 a month for as long as you live. You collect $1,500 the first month, $1,500 the next month, and $1,500 the following month. Then you get run over by a truck and die. You bet the insurance company you would outlive your $100,000 and you lost. $4,500 is all you get; they keep the rest. This is maybe not such a good deal.
Your second option is called Period Certain. This means you can take your money out over a period of 5, 10, 15, or 20 years. The insurance company guarantees to pay out all your money (plus interest) over that period. If you do not live to the end of the period, your beneficiary gets the remaining money in your annuity over the balance of the period. Live or die, you or somebody else gets back all your money.
The third option is Period Certain Plus Life. Here the insurance company guarantees to pay you a check each month for a certain period of time, plus, if you live beyond that period (even if you live to be 150 years old) you’ll receive monthly income that you cannot outlive.
The choices are not so simple. A monk in a monastery, for example, may well expect to live to a ripe old age and do better with a Lifetime Income (Although I wonder what he would spend the money on). Someone with a terminal illness may want to take a lump-sum settlement or a 5-year Period Certain. Take a close look at factors such as your health and spouse’s health, your age and spouse’s age, other sources of income, and your tax bracket.
For more flexibility you could opt for Systematic Withdrawals. In this case, you would receive a fixed percentage of the account value or a fixed monthly amount. You could stop this arrangement at any time and simply withdraw your remaining balance.
Although Systematic Withdrawals appear to have advantages over annuitization, note these two differences: With annuitization as your annuity settlement option, you can lock in a guaranteed monthly income regardless of the performance of your annuity. In addition, annuitization lengthens the tax deferral period since only part of each payment is taxed. The IRS considers the other part of your payments a return of principal.
Finally, you may want to just keep the annuity growing and not take payments at all. Some annuities, however, do not allow this and force withdrawals by a certain age. One option for you is a tax-free exchange to another annuity that may have more liberal withdrawal requirements, but watch out for surrender charges on your existing policy.
You probably never thought getting a check could be so complicated. It’s really not as messy as it sounds. In fact, I have annuity agents all across America who specialize in solving such problems. There is no charge or obligation. To have your choices compared, we would be happy to review any type of annuity settlement option and figure the most appropriate withdrawal option for you. Just click on the link in my bio below.
Monday, June 20, 2011
Annuity Settlement Options
What is wiki definition of best annuity settlement options particularly for life insurance policy? How is about death benefit settlement? Annuities are insurance coverage policies that ensure you earnings for the set time period. But, annuities essentially have one more settlement option inside the occasion which you don’t reside lengthy sufficient to make use of your financial savings. Ensure that you comprehend all your options prior to picking a settlement option.
The lifetime earnings settlement option converts all your cost savings to month to month payments. These payments are final for the whole everyday living. If you die, the payments quit. You can not give any portion of one’s annuity to a beneficiary. This settlement option is ideal once you anticipate residing a lengthy lifestyle and also you do not would like to danger operating from dollars. The threat is that you simply convert your cost savings after which die prior to you’d have in any other case utilized up your cost savings.
Short-term annuity payments are once the insurer converts your financial savings to annuity payments to get a set variety of decades. The annuity payments carry on, no matter how lengthy you reside. This indicates which you can pass in your annuity to a beneficiary. The threat of this annuity is that you simply outlive your advantage payment interval. The advantage of this arrangement is which you are specific that your cost savings will likely be compensated again with curiosity.
The death advantage settlement is for whenever you possess a deferred annuity. A deferred annuity is surely an annuity which has not however been converted to month-to-month payments. Your financial savings is handed on for your beneficiaries in complete. Your beneficiaries may possibly then get the lump sum, lifetime annuity payments or short-term annuity payments.
The payment option you pick depends upon your monetary objectives. Your annuity settlement is often utilized by you or your beneficiary. When you do not qualify for existence insurance coverage because of wellness factors, an annuity may perhaps supply revenue that your household wants immediately after you are gone.
The lifetime earnings settlement option converts all your cost savings to month to month payments. These payments are final for the whole everyday living. If you die, the payments quit. You can not give any portion of one’s annuity to a beneficiary. This settlement option is ideal once you anticipate residing a lengthy lifestyle and also you do not would like to danger operating from dollars. The threat is that you simply convert your cost savings after which die prior to you’d have in any other case utilized up your cost savings.
Short-term annuity payments are once the insurer converts your financial savings to annuity payments to get a set variety of decades. The annuity payments carry on, no matter how lengthy you reside. This indicates which you can pass in your annuity to a beneficiary. The threat of this annuity is that you simply outlive your advantage payment interval. The advantage of this arrangement is which you are specific that your cost savings will likely be compensated again with curiosity.
The death advantage settlement is for whenever you possess a deferred annuity. A deferred annuity is surely an annuity which has not however been converted to month-to-month payments. Your financial savings is handed on for your beneficiaries in complete. Your beneficiaries may possibly then get the lump sum, lifetime annuity payments or short-term annuity payments.
The payment option you pick depends upon your monetary objectives. Your annuity settlement is often utilized by you or your beneficiary. When you do not qualify for existence insurance coverage because of wellness factors, an annuity may perhaps supply revenue that your household wants immediately after you are gone.
Sunday, June 19, 2011
Annuity settlement options – Annuitize or fixed-rate loan?
Annuity settlement options can be staggering. Many people have purchased annuities of all types for the function of tax deferral. For many retirees, it is time to make the transition from accumulation to pay. Here are some considerations to determine what is best for you.
The most popular annuity settlement option early retirement – to take life for payments over a period of selections, you can rest. When you annuitizePayments (monthly, semi-annually) in exchange for the release of the pension, the pension insurance. Annuitization options usually include:
Lifetime earnings
period
Plus some period of life
Here's how life works of income. Suppose we have a $ 100,000 annuity insurance and taxes, because of their age and sex, they pay $ 1,500 per month, as long as you live. Collect $ 1,500the first month, $ 1,500 next month, and $ 1,500 a month. Then please run a truck and dies. They set the assurance that he would survive your $ 100,000 and you lost. $ 4,500 is all you get, keep the peace. This is perhaps not a good deal.
The second is that period of time. This means that you can get your money in a period of 5 years, 10, 15 or 20. The insurance guarantees payment of all your money (plus interest) in this period. If youPeriod not to live by the end of the receiver, you will get the remaining money in retirement on the balance of time. Live or die, you or someone else will return all your money.
The third option is for the period Plus Life. You pay for the insurance guarantees you a check every month for a period of time, more if you live beyond that period is monthly income that will not survive (even if you live 150 years).
The choices areis not that simple. A Monaco in a monastery, for example, can expect to live into old age and this is the best with a lifetime income (Although I would wonder what they spend the money). Someone with a terminal illness may want to take a lifetime or a period of 5 years. Take a close look at factors such as health and the health of the spouse, your spouse age and age, other sources of income and your tax bracket.
For more flexibility you could opt for the systematicDisbursements. In this case you should receive a fixed percentage of the account or a fixed monthly sum. One could continue this Agreement at any time and simply withdraw your balance.
Although systematic withdrawals seem to be the start of pension benefits, please note these two differences: annuitization option as the date of retirement, the award can be locked independently in a guaranteed annuity from the monthly performance of your pension as well. With InRetirement increases the period of deferral of tax since only a portion of each payment is taxed. The IRS believes that the other part of the payments was a return of capital.
Finally, you might want to keep only the rent increases and no payments at all. Some pensions, but do not allow this and force withdrawals by a certain age. One possibility for her is a tax free exchange into another, that the withdrawal requirements of the pension can be more liberal, but watch out for deliveryCharges on your existing policy.
You probably never thought of getting a check, it could become complicated. In reality is not as chaotic as it seems. In fact, I have the agents of pensions across America that specializes in solving such problems. It's free and without obligation. To compare your choice, we would be happy to consider any kind of figure settlement annuity option and the withdrawal option is most appropriate for you. Just click on the link below and fill out my biothe form.
The most popular annuity settlement option early retirement – to take life for payments over a period of selections, you can rest. When you annuitizePayments (monthly, semi-annually) in exchange for the release of the pension, the pension insurance. Annuitization options usually include:
Lifetime earnings
period
Plus some period of life
Here's how life works of income. Suppose we have a $ 100,000 annuity insurance and taxes, because of their age and sex, they pay $ 1,500 per month, as long as you live. Collect $ 1,500the first month, $ 1,500 next month, and $ 1,500 a month. Then please run a truck and dies. They set the assurance that he would survive your $ 100,000 and you lost. $ 4,500 is all you get, keep the peace. This is perhaps not a good deal.
The second is that period of time. This means that you can get your money in a period of 5 years, 10, 15 or 20. The insurance guarantees payment of all your money (plus interest) in this period. If youPeriod not to live by the end of the receiver, you will get the remaining money in retirement on the balance of time. Live or die, you or someone else will return all your money.
The third option is for the period Plus Life. You pay for the insurance guarantees you a check every month for a period of time, more if you live beyond that period is monthly income that will not survive (even if you live 150 years).
The choices areis not that simple. A Monaco in a monastery, for example, can expect to live into old age and this is the best with a lifetime income (Although I would wonder what they spend the money). Someone with a terminal illness may want to take a lifetime or a period of 5 years. Take a close look at factors such as health and the health of the spouse, your spouse age and age, other sources of income and your tax bracket.
For more flexibility you could opt for the systematicDisbursements. In this case you should receive a fixed percentage of the account or a fixed monthly sum. One could continue this Agreement at any time and simply withdraw your balance.
Although systematic withdrawals seem to be the start of pension benefits, please note these two differences: annuitization option as the date of retirement, the award can be locked independently in a guaranteed annuity from the monthly performance of your pension as well. With InRetirement increases the period of deferral of tax since only a portion of each payment is taxed. The IRS believes that the other part of the payments was a return of capital.
Finally, you might want to keep only the rent increases and no payments at all. Some pensions, but do not allow this and force withdrawals by a certain age. One possibility for her is a tax free exchange into another, that the withdrawal requirements of the pension can be more liberal, but watch out for deliveryCharges on your existing policy.
You probably never thought of getting a check, it could become complicated. In reality is not as chaotic as it seems. In fact, I have the agents of pensions across America that specializes in solving such problems. It's free and without obligation. To compare your choice, we would be happy to consider any kind of figure settlement annuity option and the withdrawal option is most appropriate for you. Just click on the link below and fill out my biothe form.
Saturday, June 18, 2011
Looking At Annuity Settlement Options
There is a wide variety of options that one can choose from when it comes to how you will receive your funds from an annuity. The biggest thing is going to be how you will receive the money and in what amount of payments.
The first method of annuity settlement options is the straight life option. The person receiving the payment will receive payments from the account until the end of their life in this option. This is usually a good option for those without dependents. The payments will continue even after the depletion of funds, however if the receiver dies before the funds are depleted, the bank or annuity trust will get to keep the funds that are remaining. This may not seem like a fair option, however consider the fact that this is an option primarily used by people with no beneficiaries or dependents and is only using the money to take care of themselves.
There are two other annuity settlement options to consider. These are life with amount certain and the life with period certain. In these options there are either set amount for how long the annuity will pay, or how much the annuity will pay. The period option is usually set in increments of five years, and will pay even if the primary beneficiary is deceased. With pay option, the annuity will continue to write you checks until there is no money. Either way, there is a limit to how much or how long you will be able to receive funds. These are two options to look at if you have a set time to live, or you have other means of income established to compensate if these options are depleted.
There is the joint and survivor annuity settlement option to consider. In this option the payment will continue through the lives of the two people listed as the beneficiary on the account. Many times the amount will decrease with the death of one of the parties. On this option, there is usually the ability to set a time limit of you so choose based on what it is that you would like the annuity to do for you.
There is the option to only have the annuity established to pay out for a specified amount of time. Here the money will come in for a set number of years and then at the agreed upon time, you will no longer receive checks and you will not see any of the money you are looking to have once the contract has expired.
The unit refund life liability is a way of taking care of your family once you are gone. That is if you are to pass away before all of the funds have been depleted, you will be able to have the money come to the survivor or beneficiary in the form of a lump sum payment for your survivor to use. It is up to them to see what they will do with the remaining money.
The first method of annuity settlement options is the straight life option. The person receiving the payment will receive payments from the account until the end of their life in this option. This is usually a good option for those without dependents. The payments will continue even after the depletion of funds, however if the receiver dies before the funds are depleted, the bank or annuity trust will get to keep the funds that are remaining. This may not seem like a fair option, however consider the fact that this is an option primarily used by people with no beneficiaries or dependents and is only using the money to take care of themselves.
There are two other annuity settlement options to consider. These are life with amount certain and the life with period certain. In these options there are either set amount for how long the annuity will pay, or how much the annuity will pay. The period option is usually set in increments of five years, and will pay even if the primary beneficiary is deceased. With pay option, the annuity will continue to write you checks until there is no money. Either way, there is a limit to how much or how long you will be able to receive funds. These are two options to look at if you have a set time to live, or you have other means of income established to compensate if these options are depleted.
There is the joint and survivor annuity settlement option to consider. In this option the payment will continue through the lives of the two people listed as the beneficiary on the account. Many times the amount will decrease with the death of one of the parties. On this option, there is usually the ability to set a time limit of you so choose based on what it is that you would like the annuity to do for you.
There is the option to only have the annuity established to pay out for a specified amount of time. Here the money will come in for a set number of years and then at the agreed upon time, you will no longer receive checks and you will not see any of the money you are looking to have once the contract has expired.
The unit refund life liability is a way of taking care of your family once you are gone. That is if you are to pass away before all of the funds have been depleted, you will be able to have the money come to the survivor or beneficiary in the form of a lump sum payment for your survivor to use. It is up to them to see what they will do with the remaining money.
Friday, June 17, 2011
Annuity Settlement Options: How to Decide?
Ever more people who are approaching retirement are beginning to appreciate the advantages of using annuities for all or part of their retirement funding. Most insurers offer a wide variety of potential settlement options, many of which are not included in the standard policy forms, particularly not in deferred annuities that are to be converted to payout mode. Fortunately, few insurers seek to have their annuity owners annuitize with the settlement option originally selected at the time the annuity was purchased. Since this election may have occurred decades before the time for retirement annuity benefits to commence, it is hardly likely that the option elected will still be appropriate.
Prior to the time annuity payments are to commence for any annuitant, most insurers will contact the retiree to provide information about potential settlement options and to try to educate the annuitant about the ramifications of the various settlement options available. This usually presents the potential annuitant with a hard decision or series of decisions. As we have stated before, if we all knew when we were going to die, there would be no need for life contingency annuities. Since the actual date of death is unknown to most of us, we must make compromises about the annuity options we will select.
A straight life annuity--one where annuity payments cease with the last payment prior to the death of the annuitant--provides the greatest amount of annuity payment. It is the annuity equivalent of term life insurance. Since the annuitant forfeits any remaining contract value at the time of death, the insurer generally makes larger annuity payments than for any other settlement option. This straight life annuity can often be available on joint lives so that a couple can be sure that annuity payments will continue so long as one of the joint annuitants lives. This settlement option usually appeals to people who want to maximize their retirement income and who are not concerned with leaving any legacy from the annuity to the natural objects of their bounty.
Few annuitants actually select a straight life annuity, at least not if the value of the annuity represents the bulk of their assets. If other assets will be passed to loved ones upon the death of the last remaining annuitant, then a straight life annuity may be appropriate. However, most people seem unwilling to risk the forfeiture of any remaining annuity value, particularly if they fear premature death--i.e., prior to the normal mortality assumed in the annuity tables contained in the annuity contract. Therefore, most annuitants select an annuity settlement option that permits them to hedge against premature death and the forfeiture of annuity values that such an event will trigger.
Most annuity contracts provide the standard "term and certain" annuity settlement option that provides that payments will continue for the life of the last surviving annuitant and will then continue to the beneficiary for a period of time that is selected by the annuity owner. The standard in the life insurance industry has long been a "10 year certain and life" option. The annuitant or annuitants are protected against living too long by the contractual provision that annuity payments will be made for life. However, if annuity payments are made for less than 10 years, the insurer will continue to make payments for the remaining years of the 10-year period. Most insurers will permit time periods other than 10 years. It is a fairly simple mathematical calculation for the insurer's actuaries to compute the actuarial equivalents for almost any period certain.PAGEBREAK
Other, more sophisticated options may also be available. These usually take some form of a "refund" annuity where different mathematical formulas are available to enable annuitants to hedge against forfeiture of annuity values in the event of premature death. These options may make particularly good sense if all or some portion of annuity payments are to be under a variable annuity.
One of these options that has long been used with variable annuities is the "installment refund option." This option takes the variable annuity value at the time annuity payments commence and calculates the amount of the first periodic annuity payment to be made. This dollar amount is then converted to annuity units at the then annuity unit value. Thereafter, each variable annuity payment will be the value of the annuity unit value at the time the payment is calculated and the amount of each such payment is deducted from the remaining annuity value. If the last surviving annuitant dies while any there is any remaining annuity value, such remainder is paid to the beneficiary. If the last surviving annuitant is alive after the annuity value has reached zero, annuity payments will continue for the remainder of life. The amount of the periodic annuity payments will equal the number of annuity units originally calculated when payments began multiplied against the annuity unit value at the time the calculation is made. The advantage of this "installment refund option" is that it allows annuitants and beneficiaries to benefit from favorable performance of the assets underlying the variable annuity.
Most annuity contracts will permit beneficiaries to "commute" the value of any annuity payments owing under a refund annuity and receive a lump sum payment of the present value of the future payments. This commutation value is generally calculated at a rate of interest that is roughly equivalent to the minimum rate paid by the insurer on fixed annuities.
Regardless of the settlement options elected by an annuitant or contract owner, we believe that a life contingency should be incorporated into the option chosen. There are many reasons why the lifetime protections afforded by a life annuity contingency are necessary since no one knows when they are going to die. In essence, a life contingency annuity is insurance against living too long.
In this context, we also believe that it is smart planning for retirees to hedge against inflation by having some portion of their annuities in a variable payout mode. After all, the variable annuity was originally invented to permit a hedge against inflation as afforded by a long-term investment in the American stock market. This hedge still exists and is as appropriate today as it was when the original variable annuity was first developed in the early 1950s.
Prior to the time annuity payments are to commence for any annuitant, most insurers will contact the retiree to provide information about potential settlement options and to try to educate the annuitant about the ramifications of the various settlement options available. This usually presents the potential annuitant with a hard decision or series of decisions. As we have stated before, if we all knew when we were going to die, there would be no need for life contingency annuities. Since the actual date of death is unknown to most of us, we must make compromises about the annuity options we will select.
A straight life annuity--one where annuity payments cease with the last payment prior to the death of the annuitant--provides the greatest amount of annuity payment. It is the annuity equivalent of term life insurance. Since the annuitant forfeits any remaining contract value at the time of death, the insurer generally makes larger annuity payments than for any other settlement option. This straight life annuity can often be available on joint lives so that a couple can be sure that annuity payments will continue so long as one of the joint annuitants lives. This settlement option usually appeals to people who want to maximize their retirement income and who are not concerned with leaving any legacy from the annuity to the natural objects of their bounty.
Few annuitants actually select a straight life annuity, at least not if the value of the annuity represents the bulk of their assets. If other assets will be passed to loved ones upon the death of the last remaining annuitant, then a straight life annuity may be appropriate. However, most people seem unwilling to risk the forfeiture of any remaining annuity value, particularly if they fear premature death--i.e., prior to the normal mortality assumed in the annuity tables contained in the annuity contract. Therefore, most annuitants select an annuity settlement option that permits them to hedge against premature death and the forfeiture of annuity values that such an event will trigger.
Most annuity contracts provide the standard "term and certain" annuity settlement option that provides that payments will continue for the life of the last surviving annuitant and will then continue to the beneficiary for a period of time that is selected by the annuity owner. The standard in the life insurance industry has long been a "10 year certain and life" option. The annuitant or annuitants are protected against living too long by the contractual provision that annuity payments will be made for life. However, if annuity payments are made for less than 10 years, the insurer will continue to make payments for the remaining years of the 10-year period. Most insurers will permit time periods other than 10 years. It is a fairly simple mathematical calculation for the insurer's actuaries to compute the actuarial equivalents for almost any period certain.PAGEBREAK
Other, more sophisticated options may also be available. These usually take some form of a "refund" annuity where different mathematical formulas are available to enable annuitants to hedge against forfeiture of annuity values in the event of premature death. These options may make particularly good sense if all or some portion of annuity payments are to be under a variable annuity.
One of these options that has long been used with variable annuities is the "installment refund option." This option takes the variable annuity value at the time annuity payments commence and calculates the amount of the first periodic annuity payment to be made. This dollar amount is then converted to annuity units at the then annuity unit value. Thereafter, each variable annuity payment will be the value of the annuity unit value at the time the payment is calculated and the amount of each such payment is deducted from the remaining annuity value. If the last surviving annuitant dies while any there is any remaining annuity value, such remainder is paid to the beneficiary. If the last surviving annuitant is alive after the annuity value has reached zero, annuity payments will continue for the remainder of life. The amount of the periodic annuity payments will equal the number of annuity units originally calculated when payments began multiplied against the annuity unit value at the time the calculation is made. The advantage of this "installment refund option" is that it allows annuitants and beneficiaries to benefit from favorable performance of the assets underlying the variable annuity.
Most annuity contracts will permit beneficiaries to "commute" the value of any annuity payments owing under a refund annuity and receive a lump sum payment of the present value of the future payments. This commutation value is generally calculated at a rate of interest that is roughly equivalent to the minimum rate paid by the insurer on fixed annuities.
Regardless of the settlement options elected by an annuitant or contract owner, we believe that a life contingency should be incorporated into the option chosen. There are many reasons why the lifetime protections afforded by a life annuity contingency are necessary since no one knows when they are going to die. In essence, a life contingency annuity is insurance against living too long.
In this context, we also believe that it is smart planning for retirees to hedge against inflation by having some portion of their annuities in a variable payout mode. After all, the variable annuity was originally invented to permit a hedge against inflation as afforded by a long-term investment in the American stock market. This hedge still exists and is as appropriate today as it was when the original variable annuity was first developed in the early 1950s.
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