Annuities
What Is An Annuity?
An annuity is a form of contract issued by an insurance company to an
individual in exchange for paying premiums with a guarantee that the insurance
company will honor the owner's election to either receive a fixed or variable
payment or cash surrender at some future date, often times at retirement.
Annuities have 2 phases: the accumulation and pay out (annuitization) phases.
During the accumulation phase, interest earned is tax-deferred if not surrendered
for cash. During pay out, principal and interest are paid over a period of
time in a series of payments.
Annuities are often referred to as Certificates of Deposits issued by an
insurance company. Although not guaranteed by the FDIC as CDs are, they are
guaranteed by the assets of multi-billion dollar organizations and, in many states,
by the combined assets of all insurance companies selling annuities within that
state. Key considerations when buying a fixed annuity are the financial
soundness of the insurance company (see Strength of the Insurance Company Guarantee)
and the interest the issuing company has credited policyholders in the past.
Types of Annuities
Single Premium Deferred Annuity - A lump sum payment made by an investor
who selects a maturity period for which there is a corresponding interest rate.
The income is taxed deferred until the time of cash surrender or annuity election.
Flexible Premium Deferred Annuity - An annuity that allows one or more
deposits into the contract.
Variable Annuity - Unlike other forms of annuities, a variable annuity
allows the owner to invest the funds into mutual fund-like accounts; therefore,
the variable annuity will increase in value in rising stock markets and decline in
value in declining stock markets.
Immediate Annuity - A person makes one deposit and starts receiving income
over the time period they have selected. For example a Period Certain monthly
for the next ten years or Life or Jointly as long as annuitant or spouse live.
Split Annuity - A split annuity is a combination of a Fixed Annuity (known
credited interest rate) and an Immediate Annuity.
CD Annuity - A CD Annuity guarantees a fixed rate of interest with the
option of selecting a specific period of years, up to 10, during which the
guaranteed rate is paid. The owner should use care in selecting the term since,
although the CD Annuity has no surrender charge, the owner has no access to the
funds before maturity. At maturity the owner has 3 options:
- Withdraw the funds without penalty subject to the pre-age 59½ annuity rules
- Reinvest the CD Annuity proceeds for another term with the same carrier.
- Transfer the CD Annuity proceeds to another carrier using the 1035 Exchange procedure for non-qualified annuities or the transfer procedure for qualified annuities.
Many annuities come in the form of a Single Payment Deferred Annuity or a
Flexible Payment Deferred Annuity.
Other Management Topics:
Accounting |
Business Consulting |
Business Valuation |
Charitable Giving |
Estate Planning
Financial Planning |
Investment Management |
Insurance/Risk Management
Tax Planning & Preparation |
Technology |
Links |
Find Us |
Contact Us |
Home
