Life Option

Life Option

The life option is one example of a payout scheme for an annuity contract. A variation of the joint-life payout plan is the life annuity with period certain, under which payments continue after the annuitant’s death but at a lower dollar amount and for a limited period for the spouse or beneficiary. A joint-life payout plan allows for annuitized payouts to continue beyond the death of the annuitant and until their spouse passes away. A life option is a payout method for an annuity that guarantees periodic payments for life. A fixed period contract can be useful for an investor who expects payouts from another retirement product to kick in at a later date and assures payment to a beneficiary if the investor passes away prior to the period’s end.

Annuities are financial products that allow investors to enjoy tax-deferred growth on money — either periodic or lump-sum payments — and then annuitize the plan during retirement.

What Is a Life Option?

The life option is one example of a payout scheme for an annuity contract. It guarantees periodic payments to the annuitant for the remainder of their life. Since that timeline is, by definition, unknown, the life option involves some financial risk for both the annuitant and the insurance company making those payments.

Annuities are financial products that allow investors to enjoy tax-deferred growth on money — either periodic or lump-sum payments — and then annuitize the plan during retirement.
The appeal of annuities is the certainty of the payouts, regardless of what payout structure the annuitant chooses.
A life option is a payout method for an annuity that guarantees periodic payments for life.
The joint-life option continues paying the spouse if the annuitant passes away.

How a Life Option Works

A life option is one of several payout schedules available to the owner of an annuity contract. Annuities are insurance products that investors typically purchase to provide a post-retirement income stream. The investor contributes to the annuity periodically or in a lump-sum contribution, then enjoys tax-deferred growth on that investment. The appeal of annuities lies in the certainty of the payouts, regardless of which type of payout structure the annuitant selects.

Among these payout plans, the life option is unique in that the length of the payout period is unknown. The investor will receive payments until they die. Unlike the payout period, the payout amount is known. This means that an annuitant who chooses the life option for payouts will earn more from their investment if they live long enough for their payouts to exceed their contributions to the policy.

Other options for annuity payouts tend to either emphasize a fixed period or a fixed total amount of payouts. A fixed period contract can be useful for an investor who expects payouts from another retirement product to kick in at a later date and assures payment to a beneficiary if the investor passes away prior to the period’s end. On the other hand, a fixed amount contract can be risky if this is the only source of retirement income, and the annuity value is exhausted before the investor dies.

Finally, an annuitant can elect a lump-sum payout, but this amount will generally be less than expected annuitized payments and may trigger tax liabilities that would otherwise not be a concern.

Joint-Life vs. Life Option

A joint-life payout plan allows for annuitized payouts to continue beyond the death of the annuitant and until their spouse passes away. This can be a smart choice for couples in which one spouse has not built up a sufficient retirement reserve.

A variation of the joint-life payout plan is the life annuity with period certain, under which payments continue after the annuitant’s death but at a lower dollar amount and for a limited period for the spouse or beneficiary.

Lastly, an installment-refund payout scheme guarantees payments until the death of the annuitant, followed by a lump-sum payment to a beneficiary of any remaining assets. In all of these cases, greater payouts come at a cost. Guaranteed spouse or beneficiary benefits will require higher premiums.

Related terms:

What Is an Aleatory Contract?

In an aleatory contract, the parties do not have to perform a particular action until a specific event occurs, such as natural disasters and death. read more

Annuitization Phase

The annuitization phase of an annuity refers to the period when an annuitant starts to receive payments from his or her investment in the annuity. read more

Annuities: Insurance for Retirement

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees.  read more

Beneficiary

A beneficiary is any person who gains an advantage or profits from something typically left to them by another individual. read more

Charitable Gift Annuity

A charitable gift annuity is an arrangement for a series of income payments for life, to be paid to an individual in return for a donation of assets. read more

Financial Risk

Financial risk is the possibility of losing money on an investment or business venture. read more

Income Annuity

An income annuity is an annuity contract that is designed to start paying income as soon as the policy is initiated. Discover more about it here. read more

Joint-Life Payout

A joint-life payout is a payout structure for pensions and retirement plans that provides income to a surviving spouse after the account holder dies. read more

Lump-Sum Distribution

A lump-sum distribution is a one-time payment for an entire amount due, rather than payments broken into smaller installments. read more

Single-Life Payout

Single-Life Payout in a pension means only the employee will receive the payments for the rest of his/her life. read more