The definition of an annuity is "a yearly grant or allowance, or as an investment of money entitling an investor to a series of equal annual sums over a stated period."
The single most important feature of an annuity is to provide a series of payments over a period of time. Most contracts pay the annuitant a monthly payment over their lifetime as stated in the policy. There is no other investment vehicle that can provide income for life and it is a unique feature within the realm of annuities.
An annuity can make payments for as long as the annuitant lives and also protects the owner or annuitant from outliving their money. Even if all of the money in the contract is used up, the insurance company will still make payments as long as the annuitant or owner is still alive.
Commercial annuities are provided by insurance companies and are sold by insurance agents, banks, and stock brokers. The owner of the contract pays the insurance company either a lump sum payment or if the product permits, additional premiums can be made. This is called a flexible premium annuity (FPA).
Accumulation Period or Deferral Period
The accumulation period of time is when the annuity is growing or accumulating interest.
Payout Period
This is the period of time when the insurance company begins payments to the owner or annuitant. The annuitant will be offered multiple options for their payout. The annuitant may choose an income for life or a payment for 20 years only.
Qualified or Non-Qualified
Qualified annuities are just like an IRA, Roth IRA, or your 401K. The money has not been taxed. When you take the money out, the proceeds will be 100% taxable at your tax rate. If you take money out before 59 ?, you will receive an IRS penalty. Annuities are retirement vehicles and are treated as such.
Non-Qualified (NQ) contributions to a NQ annuity are not tax deductible. The money can come from a CD, checking account, mutual funds, stocks, and a 1035 exchange from another NQ annuity.
Immediate Annuities
An immediate annuity begins making periodic payments right away or within a year of purchasing the annuity. These annuities are usually purchased with a lump sum and payments can be made monthly, quarterly, or yearly to the annuitant. Payments can be made for life, 10, 15, 20 years certain, and life. The owner has may payout options.
Deferred Annuities
A deferred annuity is one under which the annuity owner defers or delays the payments until a later date in the future. A deferred annuity accumulates interest for a certain amount of years. Some owners do not need to take payments and wish to defer payments so they will not be taxed on money they do not need.
Examples of Deferred Annuities:
Fixed Annuities
Fixed Index Annuities
Variable Annuities
Shared Characteristics
Retirement income or payments
The method of purchase is the same
Same payout options are available
Accumulation periods
Important Differences
The differences between variable and fixed annuities are:
No guarantee of principal
The owner bears any investment risk
Variable annuities are regulated by the state and federal government
Robert Eldridge holds over a decade of experience as a multiline agent/wholesaler in multiple states and currently serves on the membership council of the National Association of Insurance and Financial Advisors.
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