Life insurance firms actually sell two kinds of annuities – one to help consumers save for retirement and another customized to disperse that money in the most optimal way to the annuitant(s). They have many features in common. The owner pays a premium either as a lump sum or over time.
There is an annuitant designated who will receive the funds and their age, possibly sex and health will determine the expected length of the monthly payments. Finally, the issuing life insurance firm guarantees a rate of growth on the funds before and after the annuity starts paying. These are all factors that are considered in calculating the cost of the two kinds of annuities.
The Two Kinds of Annuities And How They Work Together
The two kinds of annuities are deferred annuities and immediate annuities. Deferred annuities are designed to maximize the growth in the premiums paid. A MYGA is a short-term deferred annuity. Indexed and variable annuities are intended to have long-term accumulation periods. The life insurance firms selling these products compete based on the accumulation rates that they can guarantee or offer.
The annuity rate in these contracts which specifies the amount of monthly payment that the annuitant is guaranteed to receive after the accumulation period is not normally competitive since the age and health of the annuitant is uncertain at the start of the deferred annuity and the market return on the accumulated funds that far in the future are also uncertain. Unless you are from a family that regularly lives to 100, in perfect health and yields on investment have plummeted since you bought the deferred annuity, you are better off exchanging that deferred annuity for an immediate annuity, the second kind of annuity contract.
In pricing an immediate annuity, all of those uncertainties are gone. The issuing life insurance company will receive a sum certain that will immediately be paid out to the annuitant. They will know the annuitant’s current health which is not a bad thing since less than perfect health will increase your monthly payments.
Finally, the issuing life insurance company will invest the premium at a known rate of return. This certainty helps increase the possible monthly payments. Since the deferred annuity can be exchanged tax free into the immediate annuity, they are really one contract for tax purposes.
Growth rate and monthly income payment guarantees are backed by the issuing insurance firm’s claims-paying ability and financial strength; therefore, choosing an insurance company with a healthy balance sheet is critical for your future. Let’s look at how these payments are calculated in more detail.
How Does An Annuity Pay Differently Depending On The Type?
Annuities can provide a steady stream of income for the rest of your life, or for a set amount of time. They may also pay to your beneficiary, a death benefit when you die. “Life” and “period certain” are two frequent payout possibilities. A lump-sum payment is a less typical option.
Annuities On Life
Life annuities are a type of insurance that pay out for the remainder of your life. They are also known as single lifers, lifers, or straight lifers. This payout option protects you from running out of money in retirement.
The amount you deposit, and your life expectancy, determine the income payments for a life annuity payout. It is important to know that life annuities do not ensure that your heirs or spouse will receive money when you pass away. As a result, this can be risky, and they should only be purchased by single people in excellent health.
Survivor And Joint
This sort of annuity payout, also known as joint life, ensures that your spouse will receive money from the annuity after your death. This option can assist your surviving spouse to continue to fund living expenses by providing a steady source of income in your absence. The disadvantage is that the income you both receive will be smaller than the payout option discussed above for a single life.
Certain Options For A Limited Time
Certain types of annuities only guarantee payments for a set period of time. You can choose when and for how long you’ll be paid with this payout option. Your annuity income is guaranteed for the time period you select. This income is provided to you until the time period ends, but if you die before the period ends, your beneficiary may be entitled to any residual payments. Another alternative with a set term is life with a set period. This ensures income for the rest of your life while also assuring that your beneficiary receives the remainder of your annuity payments if you die during the designated time period.
If, for example, you purchase a life annuity with a guaranteed payout duration of ten years and your death occurs after three years, your beneficiary is still entitled to seven years of contractual payments.Your spouse is no longer entitled to benefits if the established time period has passed.
Lump-Sum Payment
You can choose to receive a one-time lump-sum payment instead of annuitizing a deferred annuity. You will owe regular income taxes on the gains in the year you take a distribution if you choose this option. If you purchased your annuity with qualifying funds (money that has not been taxed), you may have to pay taxes on the entire amount. This could cause you to fall into a new tax bracket, which should first be reviewed with a tax professional.
Factors That Could Affect The Size Of Your Annuity Payment
Many factors, including your health, marital status and personal financial condition, are considered when determining the best annuity payout scenario. If you have a spouse, for example, you may want to consider a payout that continues after you die, such as a joint-life annuity. If you have health problems, a life-only annuity may not be the ideal option because you may not live long enough to receive the maximum payout.
Another consideration is that of the amount of your retirement savings which will be invested in an annuitized contract. You won’t be able to get that money back in a lump sum once you’ve annuitized; it can only be paid to you over a period of time. As a result, for those with a small nest egg, committing only a portion of their savings to an instant annuity may be the better option.
Finally, if you believe that social security and other investments will be sufficient to fund your retirement, an income annuity may not be necessary.
Which Annuity Is The Best Fit For You?
It can be difficult to choose the best annuity package for your specific financial position. A fixed annuity may be the ideal option if you are a conservative investor searching for assured profits, rather than a variable annuity which may create a risk component. If you are ready to purchase an annuity, please contact our helpful staff at Pillar Life Insurance. We are ready to assist you with any questions or concerns you may have and are more than happy to guide you through the process of finding the right annuity to fit your personal needs.
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