Critical decisions that an annuity investor makes occur primarily at the point of purchase and at maturity (in the case of a deferred annuity). Choosing a settlement option at the start of the annuitization phase is more significant than it appears. Your selected settlement option affects the amount of your annuity payout and has implications for your estate or beneficiaries.

There are at least four annuity settlement options. These include:

1) Straight life option

2) Straight life option with period certain

3) Straight life with refund option

4) Joint and last survivor option

Annuities are complex and varied financial products, making it possible for annuity providers to facilitate other settlement options. Even so, the four aforementioned settlement options are usually available to annuitants.

1) Straight life option

Annuities facilitate guaranteed lifetime income. The straight life option encompasses this provision. Under this settlement option, the annuitant will receive periodic payments for the remainder of their life. Once the annuitant ceases to exist, the annuity provider's obligation to continue making payments to the annuitant's estate or beneficiaries ceases. The nature of this settlement option means that it offers the annuitant the highest dollar value payment relative to other settlement options.

2) Straight life option with period certain

The "period certain" is a defined period in which the annuity provider guarantees payments to the annuitant's beneficiaries. If the annuitant passes away within the period certain, the annuity provider is only liable to make payments for the remainder of the period certain. In this settlement option, the provisions of the straight life option still apply. The settlement merely provides additional security for the annuitant's beneficiaries. However, this settlement option offers a lower periodic payment than the straight life option without the period certain.

3) Straight life with refund option

Again, the annuity provider adheres to the provisions of the straight life option with this settlement option. The "refund option" stipulates that the contingent beneficiaries are entitled to the difference between the annuity purchase price (or accumulated premiums) and the amount already disbursed to the annuitant. Naturally, the refund option is only available if the annuitant dies before receiving annuity benefits to the value of the purchase price of the annuity. This option is particularly useful with immediate annuities.

4) Joint and last survivor option

This settlement option provides for the payment of annuity benefits for the joint lifetime of two individuals. Annuity providers base payments on the lives of the two persons (typically life expectancy considerations). If one of the parties passes away before the other, the survivor may receive the benefits for the remainder of his or her life at the same level or at a reduced level- according to the terms and conditions of the settlement option.

At the point of annuitization, you should carefully consider annuity settlement options, especially when you have dependents. Even though the straight life option provides the highest periodic payments, choosing that option can be to the detriment of your dependents if you pass away soon after the annuitization phase begins. These settlement options attempt to increase the options available to you. It is incumbent on you to choose wisely and not as though you are choosing a slot on a raffle sheet.

Learn more about this author, Darrell Victor.
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