Life annuity

The life annuity (also known as a single-payment annuity) is a financial instrument that allows for a seller (issuer) - typically a financial institution such as a life insurance company - to make a series of payments in the future to the buyer (annuitant) in exchange for an immediate payment of a known sum with a certain net present value. The payment stream from the issuer to the annuitant has an unknown duration based principally upon the life expectancy of the annuitant. Generally, such an instrument stops payment at the death of the annuitant. However, it is possible to structure a life annuity so that the payments instead only stop upon the death of a second of two annuitants (i.e., a joint and survivor annuity); sometimes the instrument reduces the payments to the second annuitant.

The "pure" life annuity can have harsh consequences for an annuitant who dies before recovering their investment in the annuity. The risks of such a situation, called a "forfeiture", can be ameliorated by the addition of a added clause under which the annuity issuer is required to make annuity payments for at least a certain number of years (the "period certain"); if the annuitant outlives the specified period certain, annuity payments then continue until the annnuitant's death, and if the annnuitant dies before the expiration of the period certain, the annuitant's estate or beneficiary is entitled to collect the remaining payments certain. The tradeoff between the pure life annuity and the life-with-period-certain annuity is in exchange for the reduced risk of loss, the annuity payments for the latter will be smaller.