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).
|
