Annuity premium and timing structures

Two questions define every annuity

An annuity is the mirror image of life insurance. A life policy protects against dying too soon; an annuity protects against living too long and outliving your money. In Texas, both product families sit in the same part of the statutes — Title 7, Life Insurance and Annuities (Tex. Ins. Code Title 7) — while rules written specifically for life policies, such as the standard nonforfeiture law, live in their own chapters (Tex. Ins. Code ch. 1105; Tex. Ins. Code ch. 1101).

Every annuity contract answers two separate questions, and you should learn them as two independent dials:

1. How does the money go in? (premium structure)
2. When does the income come out? (timing structure)

Dial one: premium structure

• Single premium. One lump sum funds the contract at issue, and no further payments are made or accepted. The purchase payment is often money the owner already has in hand, such as proceeds from a sale or a settlement.
• Periodic (level or scheduled) premium. The owner pays a set amount on a set schedule — monthly, quarterly, or annually — much like paying a life insurance premium.
• Flexible premium. The owner varies the amount and the timing of payments within the limits the contract allows, so the total amount that will be contributed is not known in advance.

Dial two: timing structure

• Immediate annuity. Income payments begin shortly after the contract is purchased — generally within one payment interval. If payments are monthly, the first one arrives about a month after purchase.
• Deferred annuity. Income begins on a future date named in the contract, commonly called the annuity date or maturity date. Until then the contract is in its accumulation phase, where the value grows as interest or earnings are credited under the contract's terms.

Which combinations actually exist

Cross the two dials and three real-world products appear:

• Single premium immediate annuity — lump sum in, income starts right away.
• Single premium deferred annuity — lump sum in, income starts years later after an accumulation period.
• Flexible premium deferred annuity — many varying payments in, income starts at a future annuity date.

There is no flexible premium immediate annuity. An immediate annuity must be fully funded at purchase, because payments to the annuitant begin at once; you cannot still be adding premium to a contract that is already paying you out.

Phases, the annuity date, and payment mode

A deferred annuity has two lives. During accumulation, money flows into the contract. At annuitization the contract flips to the payout phase, and money flows out to the annuitant. An immediate annuity effectively skips accumulation and starts in payout.

Payment mode — monthly, quarterly, semiannual, or annual — is chosen in the contract. The less often payments are made, the larger each individual payment is, because the same total is spread over fewer checks.

Because premium timing, the annuity date, and payout options are all set by contract language rather than by a single universal rule, Texas Department of Insurance consumer material urges buyers to compare products and be certain they understand how a contract works before signing (Tex. Dep't of Ins. Consumer Pub. CB018).