United States
Hong KongAnnuity payout options, ranked by who is protected
Straight life pays the largest income and stops at death with nothing to a beneficiary. Every other option buys protection for someone else by reducing the payment. Life with period certain, refund options and joint and survivor all trade income for a guarantee, and the exam tests that trade directly.
One rule governs this entire sub-item, and if you hold it you can reason your way to any payout question without memorizing the list: the more people or years the insurer has to guarantee, the smaller each payment.
The options, from largest payment to smallest
| Option | What is guaranteed | Payment size |
|---|---|---|
| Straight life (life only) | Income for the annuitant's life, nothing after | Largest |
| Life with period certain | Income for life, and at least a stated number of years | Smaller |
| Life with refund (cash or installment) | Income for life, and at least the amount paid in | Smaller |
| Joint and survivor | Income while either of two people is alive | Smallest of these |
| Period certain only | Income for a stated number of years and no longer | Not a life option at all |
The last row is the odd one and it is where the marks are. Period certain only is not lifetime income. It pays for a fixed number of years and stops, whether the annuitant is alive or not, which means it fails the one job an annuity exists to do. A stem describing a client who wants income she cannot outlive rules it out immediately.
The two refund shapes
- Cash refund pays the beneficiary a lump sum for the balance of the principal not yet paid out.
- Installment refund keeps the payments running to the beneficiary until the principal has been recovered.
Same protection, different delivery. If a stem specifies that the beneficiary continues to receive the same monthly amount, that is installment refund. If it says the beneficiary receives what is left in one payment, that is cash refund.
Joint and survivor, and its fractions
A joint and survivor option pays while either annuitant lives. Contracts commonly reduce the payment when the first dies, described as joint and two-thirds survivor or joint and one-half survivor, and the fraction names what the survivor keeps receiving. A full joint and survivor keeps the payment level for the survivor, and it pays the least at the start because the insurer has guaranteed the most.
Do not confuse this with joint life annuity, which pays only until the first death. The naming is unhelpful and it is the same trap as joint life against survivorship life on the life insurance side of the outline.
An annuitant with no dependents wants the largest possible monthly income for as long as she lives and is not concerned about leaving anything behind. Which option fits?
- Life with ten-year period certain
- Straight life
- Installment refund
- Period certain only
Where the exam puts it
- Section
- I, types of policies (life), 15 questions
- Listed as
- Annuities, sub-item 6: payout options
- Question style
- Client scenario with a stated priority
- Sister topic
- Settlement options on a life policy, in section II
Annuity payout options and life policy settlement options are near neighbors and are worth learning side by side. Both are ways of turning a sum into an income and both include life income, period certain and refund shapes. The difference is what is being converted: an annuity fund the owner built, or a death benefit the beneficiary has just become entitled to. We separate them in settlement options explained.
The opinion, and the concession
Do not memorize this table. Derive it. Ask how many lives and how many years the insurer has been forced to guarantee, and the size of the payment falls out of the answer. Candidates who memorize the ranking get it right until a stem uses a phrase they did not memorize, and there are more phrasings for these options than there are options.
The concession: the outline names payout options as one sub-item and does not list them, so the list above is assembled from the standard set rather than copied from Pearson. If a form uses a name we have not covered, the derivation still works. That is the reason to prefer it.
Common questions
Which annuity payout option pays the most?
Straight life, also called life only. It guarantees income for the annuitant's life and nothing afterward, so the insurer carries the smallest obligation and can pay the largest monthly amount. Every other life option reduces the payment in exchange for protecting a beneficiary or a number of years.
What happens if an annuitant dies early on a straight life option?
Payments stop and nothing goes to a beneficiary. That is the trade the option makes and it is why the payment was larger. A client who is troubled by that outcome should be looking at a period certain or refund option, which is exactly what a suitability stem is testing.
What is the difference between cash refund and installment refund?
Both guarantee that at least the principal is paid out. Cash refund pays the unrecovered balance to the beneficiary as a lump sum. Installment refund continues the same periodic payments to the beneficiary until the principal has been recovered, then stops.
Is period certain only a lifetime income option?
No. It pays for a stated number of years and then stops, even if the annuitant is still alive, so it does not protect against outliving your money. It is the one option in the family that fails the annuity's basic purpose, which makes it a reliable distractor in suitability stems.