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.

 

Resources used:

http://www.portal.state.pa.us/portal/server.pt/community/life_insurance/9194

http://www.freeannuityrates.com/annuities/article.php?title=What-Is-An-Annuity?

http://www.freeannuityrates.com/annuities/immediate-annuity-guide.php

www.portal.state.pa.us/portal/server.pt/document/707170/annuities_pdf

 

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.

 

Resources used:

Resources used:

http://www.portal.state.pa.us/portal/server.pt/community/life_insurance/9194

http://www.freeannuityrates.com/annuities/article.php?title=What-Is-An-Annuity?

www.portal.state.pa.us/portal/server.pt/document/707170/annuities_pdf