Business Glossary

if the annuitant dies before receiving total income at least equal to the premiums paid, the beneficiary receives the difference in a lump sum. If the annuitant lives after the income paid equals the premiums paid, the insurance company continues to make income payments to the annuitant for life.

annuity that continues income payments as long as one annuitant, out of two or more annuitants, remains alive. For example, a married couple would receive an income for as long as both spouses are alive. Thereafter, payments would continue as long as the surviving spouse is alive, usually for a smaller amount. This type of annuity is ideal for a husband and wife in that it guarantees the surviving spouse an income for life. Even with a life annuity certain or other type of refund annuity, it is possible for a surviving spouse to outlive the money that has been funding the annuity.

annuity contract. If the annuitant dies before receiving income at least equal to the premiums paid, a beneficiary receives the difference in installments. If the annuitant lives after the income paid equals the premiums paid, the insurance company continues to make income payments to the annuitant for life.

contract sold by insurance companies that pays a monthly (quarterly, semiannual, or annual) income benefit for the life of a person (the annuitant). The annuitant can never outlive the income from the annuity. Upon the death of the annuitant all income payments cease. There are no beneficiary benefits under this type of annuity. Contrast with refund annuity.

series of equal periodic payments or receipts. Examples of an annuity are semiannual interest receipts from a bond investment and cash dividends from a preferred stock. There are two types of an annuity: (1) Ordinary annuity, where payments or receipts occur at the end of the period; (2) Annuity due, where payments or receipts are made at the beginning of the period.

annuity in which premium payments are used to purchase accumulation units, their number depending on the value of each unit. The value of a unit is determined by the value of the portfolio of stocks in which the insurance company invests the premiums.

At the time of the payment of benefits to the annuitant, the accumulation units are converted to a monthly fixed number of units. The variable element is the dollar value of each unit. For example, assume that the annuitant pays a monthly premium of $100. If the accumulation unit value during one month is $50, two units are purchased. In another month, if the value of the accumulation unit is $25, four units are purchased. In a third month, the value of the unit is $10, resulting in the purchase of 10 units. This allows the market use of the investment strategy of dollar cost averaging. Accumulation units are credited to the annuitant's account, a procedure that is similar to purchasing shares in a mutual fund.

When income benefits are scheduled to begin, total accumulation units are converted to assume 100 income benefit units per month. The value of the income unit will vary according to the company's stock investments; in one month the annuitant's income might be $1000, in another month $500, in another month $1200. Changes in the investment experience by the insurance company are passed on to the annuitant, but the company absorbs fluctuations in expenses and mortality experience.

annuity guaranteeing a given number of income payments whether or not the annuitant is alive to receive them. If the annuitant is living after the guaranteed number of payments have been made, the income continues for life. If the annuitant dies within the guarantee period, the balance is paid to a beneficiary. For example, under one common contract, a life annuity certain for 10 years, income payments are guaranteed for a minimum of 10 years. If the annuitant dies after receiving two years of payments, the beneficiary would receive the remaining eight years of income. An annuitant who lives out the 10 years would receive income payments for life, but there would be none available to a beneficiary.

annuity that guarantees that a specific sum of money will be paid in the future, usually as monthly income, to an annuitant. For example, a $1000-a-month income benefit will be paid as long as the annuitant lives; the dollar amount will not fluctuate regardless of adverse changes in the insurance company's mortality experience, investment return, and expenses.