Definition and Types of Annuities
Life insurance annuities are the most frequently used method of financing structured settlements.
Definition of Annuity
An annuity is a contract between the owner of the annuity policy and the life insurance company that issues the policy. The owner pays a single premium to the life insurance company today and the life insurance company, in return, promises to make future payments according to a predetermined schedule.
Parties to the Annuity
The annuitant is the "measuring life" for an annuity that pays benefits that are contingent entirely or partially on one's life. In an injury case, the annuitant is typically the injured claimant. In a death case, the annuitant is typically the surviving spouse or other dependent.
The payee is the person who is to receive the payments. The annuitant and the payee are generally the same person.
The beneficiary is the person or estate who becomes the payee when the annuitant dies.
The owner purchases and owns the annuity. Ownership rights usually include 1) the right to designate the payee and beneficiary; 2) the right to assign the annuity; and 3) the right to pledge the annuity as collateral.
Types of Annuities
An annuity which makes payments for a specific time period either to the annuitant or, in the event he/she does not live to the end of the certain only period, remaining payments would be paid to his/her beneficiary. (Example: $1,000 per month for 20 years certain only)
Deferred Annuity (As Opposed to "Immediate")
Any of the various forms of available annuities where the first payment does not begin immediately after the settlement. (Example: $1,000 per month for 20 years certain only beginning five years after settlement)
Deferred Lump Sum
An annuity that pays a lump sum amount on a specific date in the future. Plans usually involve payments which occur at periodic intervals after settlement, such as every five years. (Example: Deferred Lump Sum of $25,000 in five years; then, Deferred Lump Sum of $50,000 in 10 years; then, Deferred Lump Sum of $75,000 in 15 years)
Life Only Annuity
Annuity payments are made only for so long as the annuitant lives. Payments terminate upon the death of the annuitant. (Example: $1,000 per month for life)
Life (with Certain Period)
An annuity which agrees to pay benefits for as long as the annuitant lives, but for no less than a minimum certain period. If the annuitant dies before the certain period expires, remaining payments will be made to his/her beneficiary or estate. (Example: $1,000 per month for life with 20 years certain)
Life with Percentage Increase
An annuity which pays in the same manner as that listed above, but which also increases annually by a predetermined percentage. (Example: $1,000 per month for life with 20 years certain and increasing 3% per year)
Any of the above annuities may incorporate periodic step increases. (Example: $1,000 per month for 5 years; then $1,200 per month for 5 years; then $1,400 per month for life, with 30 years certain)
An annuity can be tied to more than one "measuring life" (annuitant). For example, the annuitants can be husband and wife and the annuity can provide that when one annuitant dies, full or partial payments continue for the lifetime of the survivor. These annuities may be combined with a period certain annuity. (Example: $1,000 per month as long as either claimant or claimant's spouse remains alive or for 20 years, whichever period is longer)