IMMEDIATE ANNUITIES
Immediate annuities are considered by many to be the original and oldest form of annuity contract on the planet
An income annuity or single premium immediate annuity (SPIA), can both be referred to as an Immediate Annuity. Payments from an Immediate Annuity are guaranteed to begin between one month and one year after purchase. Once the free-look period had expired the purchase of an Immediate Annuity is usually an irrevocable decision and cannot be undone. The benefits of an Immediate annuity are straightforward efficient.
A lump sum payment is made by the buyer of an Immediate annuity to an insurance company. The insurance company has a contractual obligation and guarantee, through the term specified in the annuity contract, that income payments will be made resulting in a type of personal pension.
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PAYMENT TERM OPTIONS
SINGLE LIFE ANNUITIES
- Single Life Only – An Annuitant’s payments are made throughout his/her lifetime and cease upon the annuitant’s death.
- Single Life with Period Certain – An Annuitant’s payments are made for their lifetime. Payments would continue to be made to the designated beneficiary, for the entire specified period certain term, if the annuitant should die before the end of the specified period term (typically between 5-20 years).
- Single Life with Installment Refund – An Annuitant’s payments are made for their lifetime. Payments would continue to be made to the designated beneficiary, equal to the original premium deposit, if the annuitant should die before receiving an amount equal to the original premium paid to purchase the annuity.
- Single Life with Cash Refund – An Annuitant’s payments are made for their lifetime. A payment would be made to the designated beneficiary in one lump sum, with the difference between the original premium deposit made and the total of payments received, if the annuitant should die before receiving an amount equal to the original premium paid to purchase the annuity.
JOINT LIFE ANNUITIES
- Joint Life Only – Payments are made for as long as either the annuitant or joint annuitant (typically a spouse) is alive.
- Joint Life with Period Certain – Payments are made for as long as either the annuitant or joint annuitant (typically a spouse) is alive. Payments would continue to the designated beneficiary until the specified period certain term ends if both annuitants should die before the end of the specified period certain term (typically 5 – 20 years).
- Joint Life with Installment Refund – Payments are made for as long as either the annuitant or joint annuitant (typically a spouse) is alive. Payments would continue to the designated beneficiary until the total of payments made equaled the original premium deposit if bot annuitants should die before receiving an amount equal to the original premium paid to purchase the annuity.
- Joint Life with Cash Refund – Payments are made for as long as either the annuitant or joint annuitant (typically a spouse) is alive. The difference between the original premium deposit made and the total of payments received would be paid in one lump sum to the designated beneficiary, if both annuitants should die before receiving an amount equal to the original premium paid to purchase the annuity.
PERIOD CERTAIN ONLY ANNUITIES
Period Certain Only Annuities Payments are made for a specified and pre-determined period of time (typically 5 – 20 years). With this option it is possible that you may outlive this payment type.
At the end of the period certain term, payments cease regardless of whether the annuitant is still living or not. Payments would continue to the designated beneficiary for the remainder of the term if the annuitant should die before the end of the certain period.
PERIOD CERTAIN ONLY ANNUITIES
Period Certain Only Annuities Payments are made for a specified and pre-determined period of time (typically 5 – 20 years). With this option it is possible that you may outlive this payment type.
At the end of the period certain term, payments cease regardless of whether the annuitant is still living or not. Payments would continue to the designated beneficiary for the remainder of the term if the annuitant should die before the end of the certain period.
Source of Funds – Qualified vs Non-Qualified
Qualified or Non-Qualified funds can be used to purchase Immediate Annuities. Qualified funds are those contained within a tax qualified account, such as an IRA. Non-qualified funds encompass everything else, except those funds held within a tax qualified account.
Since taxes have not been paid, each monthly payment of a qualified annuity is considered fully taxable income when an immediate annuity is purchased with qualified funds. However, a portion of each monthly income payment is considered a return of previously taxed principal (cost basis) and therefore excluded from taxation when an Immediate Annuity is purchased with non-qualified funds. The exclusion ratio, represented as a percentage that is calculated by the issuing insurance company, is amount excluded from taxation
