Understanding Immediate Annuities
A Single Premium Immediate Annuity (sometimes referred to as an "SPIA") may be the
right annuity for you if you are looking for payments that begin right away and
continue for the rest of your life or for a specified period of time.
In return for your lump
sum (premium), the insurance company promises to make regular payments to you
(or to a payee you specify) for the chosen length of time – most commonly for
the remainder of your life, however long that may be.
Depending on your
requirements, immediate annuity payments start one month after you buy your
annuity. When choosing an immediate annuity, you can choose how frequently you
receive payments – often referred to as the “mode.” While annuity buyers
typically choose to receive payments monthly, you may choose quarterly, or even
yearly instead.
In exchange for the
guarantee of payments, you give up the right to demand the return of your
original premium. Unlike some forms of life insurance or other types of
annuities, you are generally unable to revise or cash in the immediate annuity
once the 10-day "free look" period has passed.
You can fund your
immediate annuity in a number of ways, including cash from a maturing
Certificate of Deposit (CD), exchanging monies accumulated in a Deferred
Annuity account, proceeds from the sale of stocks, bonds, a home or a business,
a lump sum distribution from a tax-qualified defined benefit or 401k, or an IRA
account.
An immediate annuity
comes with many important advantages. Here are just a few:
·
Security — The annuity provides stable lifetime
income which can never be outlived, or which may be guaranteed for a specified
period. This advantage is crucially important to annuitants who may have
previously feared outliving their savings.
·
Simplicity — An annuity is pretty much “get it and
forget it.” Once it is set, the only work you are required to do is collect
your regular payments. With an immediate annuity, you do not need to watch
markets or track interest rates and dividends.
·
Higher
Returns — The interest
rates used by insurance companies to calculate immediate annuity income are
generally higher than CD or Treasury rates. Since part of the principal is
returned with each payment, greater amounts are received than would be provided
by interest alone.
·
Safety
of Principal — Funds are
guaranteed by assets of insurer and not subject to the fluctuations of
financial markets.
·
No
sales or administrative charges
When you shop for an
immediate annuity, you will find that one of the key factors in pricing is your
age and life expectancy. In a sense, purchasing an immediate annuity is like
making a bet with an insurance company about how long you will live. Since the
insurer will stop making payments when you die, it is betting that you won't
live beyond your life expectancy. On the other hand, if you live longer than
predicted, your return may be far greater than estimated.
Immediate annuity
coverage can be increased by including a second person ("Joint and
Survivor" annuity), by adding a guaranteed period of time ("Period
Certain" annuity), or by guaranteeing that payments will continue at least
until the original purchase amount has been paid out ("Refund"
annuity). This added risk to the insurer is likely to reduce monthly payments
by about 5% to 15%, depending on the age of the annuitants and the length of
the guarantee period.
The way your annuity
payments are taxed depends upon the source of the funds you use to purchase it.
Qualified Immediate Annuities
When applied to
immediate annuities, the term qualified refers to the tax status of the source
of funds used for purchasing the annuity. These are premium dollars which until
now have "qualified" for IRS exemption from income taxes. The whole
payment received each month from a qualified annuity is taxable as income
(since income taxes have not yet been paid on these funds). Qualified annuities
may either come from corporate-sponsored retirement plans (such as Defined
Benefit or Defined Contribution Plans), Lump Sum distributions from such
retirement plans, or from such individual retirement arrangements as IRAs,
SEPs, and Section 403(b) tax-sheltered annuities, or Section 1035 annuity or
life insurance exchanges.
Non-qualified Immediate Annuities
Non-qualified immediate
annuities are purchased with monies which have not enjoyed any tax-sheltered
status and for which taxes have already been paid. A part of each monthly
payment is considered a return of previously taxed principal and therefore
excluded from taxation. Non-qualified annuities may be purchased by employers
for situations such as deferred compensation or supplemental income programs,
or by individuals investing their after-tax savings accounts or money market
accounts, CD's, proceeds from the sale of a house, business, mutual funds,
other investments, or from an inheritance or proceeds from a life insurance
settlement.
Want more information? Contact us today, Call our office at 844-313-4752, or visit our website for more detailed information on which annuity is best suited for you.