annuity Archives - Bradford PA Insurance - Williams Insurance Agency

Understanding Annuities Part # 3

March 22, 2012 in annuities, annuities in pennsylvania, annuity, deferred annuity, disbursement phase, immediate annuity, joint and life annuity, lifetime annuities, withdrawing funds before age 59 1/2

Annuities Continued…

To continue our discussion about annuities, we should take a moment to talk about the safety of this type of investment. When an annuity buyer puts up a substantial amount of savings as an investment, the holder is expecting that investment to provide regular annuity payments for the rest of his/her life. Therefore, the security of that investment and of the insurance company providing the annuity is of primary importance. The insurance company is contractually obligated to provide those lifelong payments, and consequently must invest those funds very carefully. The interest rates of an annuity are determined by the insurance company and the type of investment results that have been obtained by the insurer. There are, however, guaranteed minimum rates for annuities in Pennsylvania. The typical minimum rate is 3%, but it can be higher for a limited time, depending on the holder’s contract. For instance, a guaranteed 6% interest rate may be in effect for the first 6 years of a deferred annuity contract. After that time period is over, then the interest rate will drop to 3% or a new guaranteed rate may be put in effect by the insurance company.

In addition to the immediate annuity that we discussed previously, a second type of annuity available to investors is the deferred annuity.

Deferred Annuity

Investment in this type of annuity consists of regular payments that take place over a period of years. These regular payments are received and invested by the insurance company, in order to earn interest. The specific payment amounts and schedule are determined by the annuity contract. Deferred annuities are purchased by people of working age who want to begin accumulating retirement money during their working years. The time period between the insured’s payments and the annuity’s payout is called the accumulation period. During this accumulation phase, no taxes are owed on the credited interest. This tax deferral is a significant advantage of annuity investment. Withdrawal provisions during this phase are extremely limited and can result in significant penalties. The annuity holder will incur a 10% tax penalty from the IRS for withdrawing funds before age 59 ½, as well as penalties imposed by the insurance company. Once the holder reaches retirement age and payout begins, then the regular distributions are taxed as ordinary income by the IRS.

Once the disbursement phase begins, the annuity holder will receive regular payouts according to the terms stipulated in the contract. As a lifetime annuity, the classic payout design for a deferred annuity is the same as that described in the discussion of immediate annuities; distribution payments continue for the life of the holder. The contract then terminates with the death of the holder and any remaining funds revert to the insurance company upon the death of the annuity purchaser.

Most lifetime annuities also provide for a beneficiary variation. In this variation, the holder can designate one or more beneficiaries that will continue to receive payouts until all of the annuity funds have been disbursed or a designated time period has been reached. Beneficiary provisions usually come at a higher initial annuity cost. Another possible variation involves multiple annuitants (annuity purchasers/holders). A joint-and-life annuity pays regular payments until the first annuitant dies; a joint-and-survivors annuity pays until both holders die.

Deferred annuities can be fashioned as fixed deferred, variable deferred, or indexed deferred.  We will discuss the particulars of fixed, variable, and indexed annuities in upcoming articles.



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Understanding Annuities Part # 2

March 15, 2012 in annuities, annuity, deferred annuities, fixed annuities, immediate annuities, indexed annuities, investors, lump sum investment, variable annuities

Types of annuities

Annuities are a type of retirement account that individuals purchase through their insurance company. In general, most annuities are purchased by individuals between the ages of 45 and 55. The age of the purchaser can have a bearing on the annuity option that is purchased. Funds that are placed in an annuity are allowed to grow tax-deferred. Although annuities are investment contracts rather than insurance policies, they do have some common insurance features such as minimum guarantees and death benefits.

There are as many different type of annuities as there are investors who need them. The primary classification is between deferred and immediate annuities. Deferred annuities accumulate money like a savings account for later withdrawal, whereas immediate annuities pay back an initial lump-sum investment plus interest over a period of years. The second basic difference between annuities is how they accumulate and credit interest, either as fixed, variable, or indexed products.

The annuities that will be explored in the next few articles include:

  • Immediate Annuities
  • Deferred Annuities
  • Fixed Annuities
  • Variable Annuities
  • Indexed Annuities

In this article we will discuss the first type of annuities – the immediate annuity.

Immediate Annuity

As the name suggests, this annuity provides the quickest payout to the annuity holder. With an immediate annuity, the purchaser makes a single, lump sum payment for the annuity. Soon after, the holder begins receiving regular disbursements, creating a retirement income stream. These annuities are typically purchased by retirees, using some of their accumulated savings to provide supplemental income in the form of regular, level payments for the remainder of their lives.

Although the term is “immediate,” the distribution of funds does not begin immediately after signing the contract. The purchaser must first pay the insurance company for the annuity, and those funds must then be invested by the insurer in order to begin generating income. Depending on the terms of the contract, disbursements to the holder may be made monthly, quarterly, semi-annually, or annually. Thus, it is possible that the holder may not receive their first payment for up to a year after purchasing an immediate annuity.

Lifelong distribution is the typical disbursement method with an immediate annuity. This plan allows the holder to receive payments for the rest of their life; at the end of the purchaser’s life, the insurer claims any remaining, undistributed funds. There are variations of this annuity that allow the purchaser to name one or more beneficiaries. In these cases, the beneficiary would receive the remainder of the distribution amount. Or, if the purchaser had elected to receive payments for a certain time period and suffered an early death, their beneficiary would receive payments for the remainder of the contracted period.


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Understanding Annuities Part #1

March 8, 2012 in annuities, annuity, annuity contracts, distribution period, investment option, lump sum investment, retirement option, retirement plan

Annuities – The Safest Conservative Investment

While most of us have heard of annuities and many of us have investigated annuities as an investment option, you may still have unanswered questions that this article can help to answer.

What is an annuity?

Simply put, an annuity is a type of retirement option obtained through an insurance company. In exchange for a lump sum investment or a series of initial contributions, the insurance company will provide a regular stream of income to the individual. These payments may have a specific duration or continue for the life of the individual; it depends upon the contract. The common feature of all annuity contracts is the option of the individual to receive life-long, regular payments from the insurance company. This is the feature that makes annuities an attractive addition to a retirement plan. The features of a specific annuity are determined by the annuity contract.

The basic features of an annuity contract

While annuities can vary greatly in their requirements and details, certain basic features are common to all annuities. These include:

  • Payments made to the insurance company by the policy holder.

These payments may be a single lump sum, or a series of payments whose amount and duration are specified in the contract. The purpose of the payment is to provide the initial source of investment funds.

  • A period during which funds are accumulated. This time period usually lasts for several years, except in the case of a single lump sum payment. During this accumulation period, the compounded growth of the fund is tax-free. Also during this period, withdrawal of funds by the annuity holder is extremely limited, and subject to hefty fees by the IRS and the insurance company. Any withdrawals by the holder before the age of 59 ½ are subject to a 10% penalty imposed by the IRS, as well as income taxes on the withdrawn funds.
  • A distribution period which begins once the annuity holder reaches the age of 59 ½ or older. During the distribution period, the invested proceeds are returned to the annuity holder in regular payments. These payments are considered by the IRS to be regular income, not capital gains. The payments will continue to be made until the holder dies; at that time the annuity will pay out to the holder’s beneficiary or beneficiaries.

Because annuities come with features such as death benefits and life-expectancy estimates, they are considered insurance products and are offered by insurance companies. There are also several different types of annuities, which we will discuss in subsequent articles.


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