Overview: Once an annuitant is ready to receive income, they choose a settlement option — the structure governing how and how long payments are made. The choice is typically irrevocable and profoundly affects both the monthly payment amount and the legacy left to heirs.

The governing principle: more guarantees and more lives covered = lower monthly payment. The insurer takes on more expected liability, so it reduces each periodic check to compensate.

Life Only (Straight Life)

A life-only option pays the maximum possible monthly amount for exactly as long as the annuitant lives — and stops immediately when they die. No benefit passes to heirs under any circumstances. If an annuitant dies after receiving just one payment, the insurer keeps the remainder.

This option maximizes income for the annuitant at the cost of zero legacy protection. It is most appropriate for clients with no dependents who have funded their estate plan through other means (such as life insurance).

Life with Period Certain

Under a life with period certain option, payments are guaranteed for the annuitant's lifetime, but also for a minimum period (typically 5, 10, 15, or 20 years). If the annuitant dies before the period ends, the remaining payments continue to the designated beneficiary for the rest of that period. If the annuitant outlives the period, payments continue for life with nothing passing to heirs.

The monthly payment is moderately lower than life-only because the insurer guarantees at least the certain period's worth of payments. Longer certain periods produce lower monthly amounts.

Joint and Survivor

A joint and survivor option covers two lives — usually spouses — and continues making payments until the second person dies. The owner chooses the survivor benefit percentage: 100% (survivor receives the full payment), 75%, or 50% (survivor receives a reduced amount after the first death).

Because the insurer expects to pay over two lifetimes, the initial monthly payment is lower than any single-life option. A 100% joint and survivor annuity produces the lowest initial payment; a 50% joint and survivor produces a somewhat higher initial payment (because total expected payouts are lower). This option is critical for married couples who depend on the annuity income to cover shared household expenses.

Life with Refund (Cash or Installment Refund)

Under a refund option, if the annuitant dies before total payments received equal the original premium, the difference is paid to the beneficiary — either as a lump sum (cash refund) or in continuing installments (installment refund). The monthly payment is moderately lower than life-only to compensate the insurer for this guaranteed minimum payout.

Period Certain (Fixed Period)

A period certain option makes payments for a specified number of years regardless of the annuitant's survival. If the annuitant dies before the term ends, payments continue to the beneficiary. If the annuitant outlives the term, payments stop. This is a non-lifetime option — it does not protect against longevity risk.

Interest Only

Under an interest-only option, the insurer holds the principal and pays only the earned interest. The principal remains intact and is eventually distributed to beneficiaries upon the owner's death. Monthly payments are low because only investment earnings are distributed.

Life Only vs. Period Certain: A Closer Look

This comparison trips up many exam candidates. Consider a client choosing between life only and a 10-year period certain option:

Under life only, the annuitant receives the highest possible monthly check for life. If they die in year 2, the insurer keeps everything. If they live to 95, they collect for 30 years — a massive total benefit.

Under a 10-year period certain (not life with period certain), payments are guaranteed for exactly 10 years and stop, regardless of whether the annuitant is alive. If the annuitant dies in year 3, the beneficiary receives the remaining 7 years of payments. If the annuitant lives past year 10, payments stop even though they are still alive. This option eliminates longevity protection in exchange for guaranteed beneficiary coverage.

The life with 10-year period certain option is different: it combines lifetime income with a guaranteed 10-year floor. It produces a moderately lower monthly payment than pure life-only but protects the beneficiary if death occurs in the first 10 years.