Annuities
An annuity is a contract between the client annuitant/owner, and an insurance company, the contract issuer. Simply put an annuity is a systematic liquidation of an asset. This translates to a client receiving a guaranteed income from an insurance company for a specified number of years or for a lifetime. Annuities were developed by life insurance companies to provide income to individuals during their retirement years. An annuity allows the earnings to be tax deferred until the client begins to receive payments from the insurance company. Over a long period of time, your investment in an annuity can grow substantially larger than if you had invested money in a comparable taxable investment. Like a qualified retirement plan, a tax penalty may be imposed if you begin withdrawals from an annuity before age 59½. Unlike a qualified retirement plan, contributions to an annuity are not tax deductible, and taxes are paid only on the earnings when distributed. Annuities have an accumulation (or investment) phase and the distribution (or payout) phase. The accumulation (or investment) phase is the time period when the annuity is growing by earning interest on a tax deferred basis. Annuities can be purchased via a single premium method or with periodic investments over time. The distribution (or payout) phase is when the owner starts to receive distributions from the annuity. As a client you can choose to receive the money in a lump sum, unscheduled withdrawals or through a systematic payment option. An annuity owner can also elect to receive the annuity payments over two lifetimes, this is referred to as a joint and survivor annuity. Under a joint and survivor annuity, the insurance company promises to pay an amount of money over two lifetimes, usually husband and wife, on a periodic basis (monthly, quarterly, annually). An immediate annuity is similar to the type outlined above. However, the client purchasing an immediate annuity chooses to start their income stream within the first year of purchasing an annuity. There are several types of annuities, such as fixed, indexed, differed, immediate, single premium, multiple premium, qualified, non-qualified just to name a few. However, the two most important things to remember about an annuity is that they allow for a lifetime income and they grow on a tax differed basis.
Informational purposes only.