Annuity
A contract that provides income for a specified period of years, or for life. Protects a person from outliving their money. A vehicle for the accumulation of money. *A long term investment that an individual makes w an insurance company designed for retir
Accumulation period
The period of time over which the annuitant makes payments (premiums) into an annuity. Period of time during which the payments earn interest and grow.
Annuity period
The time over which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant. May last for the lifetime of the annuitant.
Owner
The person who purchases the contract, but does not have to be the one receiving the benefits. Has all the rights such as naming the beneficiary and surrendering the annuity.
Annuitant
The person who receives benefits or payments from the annuity and for whom the annuity is written and whose life expectancy is taken into consideration.
Beneficiary
The person who receives the benefits from the annuity if the annuitant dies during the accumulation period.
Life Insurance vs. Annuities
Annuities are not life insurance; they do not pay the face amount upon the death of the annuitant. They are the opposite. In most cases, the payment phase stops upon the death of the annuitant. Annuities do use a mortality table, but this table reflects a
Tax deferred
Investments on which applicable taxes (income & capital gains) are paid at a future date instead of in the period in which they are incurred
Deferred annuities
An annuity that is purchased with a single, lump sum, or is purchased through periodic payments. Unique in that they grow tax deferred. The income payments begin sometime after one year from the date of purchase. *Not payed until you begin taking income.
Deferred Annuities are often use to:
Accumulate funds for retirement. The owner will receive the current interest rate or the guaranteed interest rate, whichever is higher.
Single Premium Deferred Annuities (SPDAs)
The annuity is purchased with a single payment, but the benefit is not paid until after one year or more has elapsed.
Flexible Premium Deferred Annuities (FPDAs)
The annuity is purchased with multiple payments that can vary from year to year (a portion of each paycheck), and the benefit payments begin sometime after one year from the date of purchase (payouts start at age 65)
Nonforfeiture
A deferred annuity has a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization.
Surrender Charges
Insurance companies apply charges to deferred annuities that are surrendered prematurely to discourage the surrender of the annuity and compensate the company for loss of the investment value. Generally, the charge is a percentage that reduces over time (
At surrender the owner gets...
Their premium, plus interest (the value of the annuity), minus the surrender charge. ($700 Premium + $35 Interest) - $70 Surrender = $665 Value of the Annuity
If the annuitant dies during the accumulation period...
The insurer is obligated to return to the beneficiary either the cash value or the premiums paid, whichever is greater. If the beneficiary is not named, the benefit will be paid to the estate of the annuitant.
Variable Annuities
Bring investing and insurance together; 4 advantages: tax deferral, choice and flexibility, legacy protection, and the opportunity for guaranteed income.
How do people typically fund an annuity?
1. Personal check 2. Transfer from another retirement account or annuity