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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