Annuity Units and Periodic Payments
When the investor decides to annuitize the contract, the insurance company converts accumulation units to annuity units. Like accumulation units, annuity units will grow in value with the market. Unlike accumulation units, the number of annuity units in the subaccount will basically remain fixed for the duration of the contract.
Periodic payments to the investor do not exhaust the contract’s value. When the payout period of an annuity begins, the investor surrenders the value of the contract to the insurance company in exchange for the regular stream of payments.
The size of the first monthly payment in a variable annuity is determined based on the age and gender of the annuitant, the account value, the agreed upon assumed interest rate, and the settlement option. An older annuitant can expect to receive a larger monthly payment than a younger one; a female the same age as a male can expect a lower monthly payment.
Assumed interest rate. An assumed interest rate (AIR) represents the estimated return that the insurance company expects to make on their contract during the payment period. A fund that projects a higher expected return over the anticipated life of the contract will generate a higher initial monthly payment than a fund whose expected return is lower.
Settlement options. When annuitization begins, the insurance company will present the investor with a number of methods for receiving payment. The investor will choose one of them, based on his cash flow and planning needs. A sampling of these methods is listed below.
- • Life income—The insurer pays the annuitant an income during his lifetime. When the annuitant dies, benefits stop. Because this option is likely to be the shortest amount of time and therefore the least expensive for the insurance company, the annuitant will receive the largest monthly check with this option.
- • Life with period certain—The insurer pays the annuitant