Life Annuity Variants
A life or lifetime annuity is used to provide an income for the life of the annuitant similar to a defined benefit or pension plan. A life annuity is somewhat like a loan that is made by the contract owner to the issuing insurance company, who then pays back the original capital or principal which is not taxed with interest and/or gains to the annuitant on whose life the annuity is based. In life annuity the contract owner pays to the insurance company and gets the interest or gains in return from the company which is taxed as ordinary income. The assumed period of the loan is based on the life expectancy of the annuitant.
Life annuity variants
An annuitant can also be purchased on another life such as a spouse, family member or friend whose life the annuity is wholly or partly guaranteed either by increase in payment or decrease in benefit.
The other variant is Life with period certain annuities. It is more suitable for the people who have accumulated money during their work time and would not like to lose it if they were to die soon after their annuitization. At least the period certain payments will be made to their beneficiary.
Some insurance companies also offer Impaired life annuities for smokers or those with a regular illness. In these cases since the expectancy of life is reduced the annual payments to the annuitant is raised.
A life annuity’s price is based on the probability of the nominee surviving to receive the payments which will be made in the return of invested amount. Longevity insurance is a form of annuity that defers commencement of the payments until very late in life. If the nominee dies before payments commence then there is no payable benefit. This reduces the cost of the annuity drastically while still providing protection against outliving one's resources.