Two Main Annuity Types:
Immediate and Deferred
The difference between deferred and immediate
annuities is just about what you'd think.
With an immediate annuity, your income
payments start right away (technically,
anytime within 12 months of purchase).
You choose whether you want income guaranteed
for a specific number of years or for
your lifetime. The insurance company calculates
the amount of each income payment based
on your purchase amount and your life
expectancy.
A deferred annuity has two phases: the
accumulation phase, where you let your
money grow for a while, and the payout
phase. During accumulation, your money
grows tax-deferred until you take it out,
either as a lump sum or as a series of
payments. You decide when to take income
from your annuity and therefore, when
to pay the taxes. Gaining increased control
over your taxes is one of the key benefits
of annuities.
The payout phase begins when you decide
to take income from your annuity. For
most people, this is during retirement.
As your needs dictate, you can take partial
withdrawals, completely cash-out (surrender)
your annuity, or convert your deferred
annuity into a stream of income payments
(annuitization). This last option is essentially
the same as buying an immediate annuity.
Single Premium
Immediate Annuities (SPIAs) are purchased
by a single deposit. They usually start
making regular monthly payments to you
immediately after the date you make that
deposit. The key ingredient for an immediate
annuity is the exchange which takes place
between the insurance company and the
buyer. The company promises to pay a monthly
income for the life of the annuitant and
the buyer gives up his rights to ever
receiving his deposit back in a lump sum.
Once an immediate annuity makes its first
payment, it generally cannot be cashed
in.
An immediate annuity
can be purchased with funds from a variety
of possible sources, such as: a maturing
Certificate of Deposit (CD); monies which
have accumulated in a Deferred Annuity
account (see below); or funds from a tax-qualified
defined benefit or profit-sharing plan,
or from an IRA account.
Why should I consider
buying an Immediate Annuity? What are
its advantages to me?
Immediate annuities
provide many advantages to the buyer,
such as: (1) Security - the annuity provides
stable lifetime income which can never
be outlived or which may be guaranteed
for a specified period; (2) Simplicity
- the annuitant does not have to manage
his investments, watch markets, report
interest or dividends; (3) High Returns
- the interest rates used by insurance
companies to calculate immediate annuity
income are generally higher than CD or
Treasury rates, and since part of the
principal is returned with each payment,
greater amounts are received than would
be provided by interest alone; (4) Preferred
Tax Treatment - it lets you postpone paying
taxes on some of the earnings you’ve
accrued in a "tax-deferred"
annuity when rolled into an immediate
annuity (only the portion attributable
to interest is taxable income, the bulk
of the payments are nontaxable return
of principal); (5) Safety of Principal
- funds are guaranteed by assets of insurer
and not subject to the fluctuations of
financial markets; and (6) No sales or
administrative charges.
SPIAs are particularly
suitable for providing income in the following
situations: (1) Retirement from Employment;
(2) Terminal Funding or Pension Terminations
(including deferred commencements); (3)
Retired Life Buyouts; (4) Professional
Sports Contracts; and (6) Credit Enhancement
and Loan Guarantee Transactions.
Immediate Annuity
Definitions Period
Certain Only Annuities
5-Years Period
Certain (Without Life Contingency): Level
payments are received for 5 years. If
the annuitant should die before the end
of the certain period, payments will be
paid to the designated beneficiary. No
payments are made to the annuitant after
the end of the specified period. (You
may outlive this type of annuity.)
10-Years Period
Certain (Without Life Contingency): Level
payments are received for 10 years. If
the annuitant should die before the end
of the certain period, payments will be
paid to the designated beneficiary. No
payments are made to the annuitant after
the end of the specified period. (You
may outlive this type of annuity.)
15-Years Period
Certain (Without Life Contingency): Level
payments are received for 15 years. If
the annuitant should die before the end
of the certain period, payments will be
paid to the designated beneficiary. No
payments are made to the annuitant after
the end of the specified period. (You
may outlive this type of annuity.)
20-Years Period
Certain (Without Life Contingency): Level
payments are received for 20 years. If
the annuitant should die before the end
of the certain period, payments will be
paid to the designated beneficiary. No
payments are made to the annuitant after
the end of the specified period. (You
may outlive this type of annuity.)
Single Life Annuities
Single Life Only,
Without Refund: Level payments are received
for the annuitant’s lifetime and
cease upon the annuitant’s death.
Single Life with
5-Years Certain (aka 5-Years Certain &
Continuous): Level payments are received
for the annuitant’s lifetime. However,
if the annuitant should die before the
end of 5 years, payments will be paid
to the designated beneficiary until the
end of the 5 year period.
Single Life with
10-Years Certain (aka 10-Years Certain
& Continuous): Level payments are
received for the annuitant’s lifetime.
However, if the annuitant should die before
the end of 10 years, payments will be
paid to the designated beneficiary until
the end of the 10 year period.
Single Life with
15-Years Certain (aka 15-Years Certain
& Continuous): Level payments are
received for the annuitant’s lifetime.
However, if the annuitant should die before
the end of 15 years, payments will be
paid to the designated beneficiary until
the end of the 15 year period.
Single Life with
20-Years Certain (aka 20-Years Certain
& Continuous): Level payments are
received for the annuitant’s lifetime.
However, if the annuitant should die before
the end of 20 years, payments will be
paid to the designated beneficiary until
the end of the 20 year period.
Single Life with
25-Years Certain (aka 25-Years Certain
& Continuous): Level payments are
received for the annuitant’s lifetime.
However, if the annuitant should die before
the end of 25 years, payments will be
paid to the designated beneficiary until
the end of the 25 year period.
Single Life with
Installment Refund: Level payments are
received for the annuitant’s lifetime.
However, if the annuitant should die before
receiving an amount equal to the original
premium, the periodic payments will continue
to be paid to the designated beneficiary
until the total payments made (annuitant
and beneficiary) equal the original premium
(without interest).
Single Life with
Cash Refund: Level payments are received
for the annuitant’s lifetime. However,
if the annuitant should die before receiving
an amount equal to the original premium,
the difference between the premium and
the total payments received will be paid
in one lump sum to the designated beneficiary.
Joint & Survivor
Annuities
Joint & Survivor
(50%..75%) reducing on FIRST or EITHER
death: Full level payments are made as
long as both the annuitant and joint annuitant
are alive. Upon the death of either the
annuitant or joint annuitant, reduced
(50%...75%) level payments will continue
to the survivor for as long he/she is
alive.
Adding a Period
Certain provision to a Joint & Survivor
(50%...75%) annuity accomplishes the following:
Even if the annuitant or joint annuitant
dies before the end of the certain period,
payments to the survivor will not reduce
until after the end of the certain period
(5-25 years). If both the annuitant and
joint annuitant die before the end of
the certain period, full level payments
will be paid to the designated beneficiary
until the end of the certain period.
Joint & Survivor
(50%..75%) reducing ONLY ON DEATH OF PRIMARY
ANNUITANT: Full level payments will be
made for as long as both the annuitant
and contingent annuitant lives. Payments
are never reduced to the Primary Annuitant.
Payments are reduced to the Contingent
annuitant should the Primary Annuitant
predecease the Contingent Annuitant. (Note:
This form is sometimes called Joint and
Contingent annuity. However, be careful,
many companies interchange their definitions
for Joint and Survivor and Joint and Contingent
forms. Verify that your company’s
interpretation of a survivor annuity is
what you have in mind to purchase.)
Adding an Installment
Refund provision to a Joint & Survivor
(50%...75%) annuity does the following:
Full level payments will be made for as
long as both the annuitant and contingent
annuitant lives. Depending on whether
the annuity is of the Joint & Survivor
or Joint and Contingent type (see above),
payments may reduce upon the death of
either annuitant or only if the primary
annuitant predecease the contingent Annuitant.
However, if both the primary annuitant
and joint annuitant should die before
receiving in periodic payments an amount
equal to the original premium, then the
periodic payments continue to be paid
to the estate or designated beneficiary
until the total payments made (to both
annuitants while living and to the beneficiary
after the annuitants' deaths) equals the
original premium (usually, without interest).
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