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What are the different types of annuities?

Immediate Annuities:

Immediate annuities are annuities designed to pay owners a determined amount of money on a monthly, quarterly, semi-annual or annual basis. An immediate annuity can be either fixed-rate or variable-rate. The fixed rate will guarantee you a set income that will not fluctuate, whereas the variable option will fluctuate with the performance of the selected investments on which your variable annuity is based. The amount you receive will depend on initial premium deposit, the length of time (term) of your annuity, and the guarantees set forth by the particular insurer.

Single Premium Immediate Annuities, or SPIA’s, are particularly suitable for providing income in the situations listed below:

(1) Retirement from employment
(2) Terminal Funding or Pension Terminations
(3) Retired Life Buyouts
(4) Professional Sports Contracts
(5) Credit Enhancement & Loan Guarantee Transactions

About Single Premium Immediate Annuities (SPIAs): An SPIA is usually purchased in order to convert assets from savings and investments, selling a business, rollovers or payouts from a pension plan into a guaranteed stream of payments for retirement income. SPIAs are also used to provide deferred compensation to an employee on separation or retirement.

Why invest in a SPIA?

  • Stable Income to cover your regular living expenses
  • No Investment Risk
  • Income that you cannot outlive
  • Tax advantages if using non-qualified funds
  • Piece of mind of knowing that a portion of your income is stable and predictable.

Immediate annuities provide many advantages to the consumer, which include:

(1) Security – the annuity provides stable lifetime income which can never be outlived or which may be guaranteed for a specified period;
(2) Simplicity – the annuitant does not have to manage their investments, watch markets, report interest or dividends;
(3) High Returns – the interest rates used by insurance companies to calculate immediate annuity income are normally 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;
(4) Preferred Tax Treatment – this lets you postpone paying taxes on some of the earnings you have accrued in a “tax-deferred” annuity when rolled into an immediate annuity
(5) Safety of Principal – funds guaranteed by assets of insurer, but also not subject to the fluctuations of financial markets;
(6) No sales or administrative charges.

Rated Annuities:

A type of immediate annuity that takes into consideration your poor health, this may actually benefit you when purchasing an immediate annuity. Those who are in poor health and demand as much income as possible may have their life expectancy shortened, which allows an insurance company to pay an elevated income because of this shortened life expectancy.

Fixed Annuities:

Fixed annuities are characterized by a minimum interest rate guaranteed by the issuing insurance company. Typically, a minimum annuity benefit is also guaranteed. With a fixed annuity, the focus is on safety of principal and stable investment returns. The fixed-rate annuity is very similar to a bank CD, but typically pays a higher minimum interest rate and offers greater security. You receive this amount no matter if the market goes down, interest rates decline or the insurer has an unprofitable year. Fixed annuities are a secure and safe, no-risk investment, which makes them popular with conservative investors and those who want to pinpoint exact returns on their investments.

Variable Annuities:

Variable annuities allow owners to invest their annuity premium in any way they see fit. The insurance company does not share in the profits of investments or protect losses. Variable annuities carry the same risks as individual stocks, bonds or mutual funds. If the securities the Annuity is based on go up 20%, for example, you keep all gains; if the investments decline 20%, you must take the loss. Variable annuities provide flexibility, allowing investors to invest simultaneously across a wide array of securities: bonds, mutual funds, stocks, futures, etc. They are designed for more aggressive investors who desire investment flexibility. A nonqualified variable annuity, i.e. an annuity purchased outside of an IRS-approved plan such as a 401(k), is frequently used by long-term investors as a supplement to employer-sponsored retirement plans.

Equity-indexed Annuities:

Equity Indexed Annuities (EIAs) are characterized by a contract return that is the greater of an annual minimum rate (typically 3%) or the return from a stock market index (such as the Standard & Poor’s 500 index) reduced by certain expenses and formulas. If the chosen index rises sufficiently during a specific period, a greater return is credited to the contract owner’s account for that period. If the stock market index does not rise sufficiently, or even declines, the lower minimum rate is credited. An owner is guaranteed to receive back at least all principal, provided an EIA contract is held for a minimum period of time.

Definitions:

Period certain annuities

  • 5-Years Period Certain (Without Life Contingency): Level payments are received for 5 years. If the annuitant should die before the end of the certain period, payments will be paid to the designated beneficiary. No payments are made to the annuitant after the end of the specified period. (You may outlive this type of annuity.)
  • 10-Years Period Certain (Without Life Contingency): Level payments are received for 10 years. If the annuitant should die before the end of the certain period, payments will be paid to the designated beneficiary. No payments are made to the annuitant after the end of the specified period. (You may outlive this type of annuity.)
  • 15-Years Period Certain (Without Life Contingency): Level payments are received for 15 years. If the annuitant should die before the end of the certain period, payments will be paid to the designated beneficiary. No payments are made to the annuitant after the end of the specified period. (You may outlive this type of annuity.)
  • 20-Years Period Certain (Without Life Contingency): Level payments are received for 20 years. If the annuitant should die before the end of the certain period, payments will be paid to the designated beneficiary. No payments are made to the annuitant after the end of the specified period. (You may outlive this type of annuity.)

Single Life Annuities (aka Straight life annuities)

  • Single Life Only Without Refund: Level payments are received for the annuitant’s lifetime and cease upon the annuitant’s death.

  • Single Life with 5-Year Certain(aka: 5 year certain and life): Level payments are received for the annuitant’s lifetime. However, if the annuitant should die before the end of 5 years, payments will be paid to the designated beneficiary until the end of the 5 year period.
  • Single Life with 10-Year Certain(aka: 10 year certain and life): Level payments are received for the annuitant’s lifetime. However, if the annuitant should die before the end of 10 years, payments will be paid to the designated beneficiary until the end of the 10 year period.

  • Single Life with 15-Year Certain(aka: 15 year certain and life): Level payments are received for the annuitant’s lifetime. However, if the annuitant should die before the end of 15 years, payments will be paid to the designated beneficiary until the end of the 15 year period.
  • Single Life with 20-Year Certain (aka 20-Years Certain and life):Level payments are received for the annuitant’s lifetime. However, if the annuitant should die before the end of 20 years, payments will be paid to the designated beneficiary until the end of the 20 year period.
  • Single Life with 25-Year Certain (aka 25-Years Certain and life):Level payments are received for the annuitant’s lifetime. However, if the annuitant should die before the end of 25 years, payments will be paid to the designated beneficiary until the end of the 25 year period.
  • Single Life with Installment Refund: Level payments are received for the annuitant’s lifetime. However, if the annuitant should die before receiving an amount equal to the original premium, the periodic payments will continue to be paid to the designated beneficiary until the total payments made (annuitant and beneficiary) equal the original premium (without interest).
  • Single Life with Cash Refund: Level payments are received for the annuitant’s lifetime. However, if the annuitant should die before receiving an amount equal to the original premium, the difference between the premium and the total payments received will be paid in one lump sum to the designated beneficiary.

Joint & Survivor Annuities

  • Joint & Survivor (50%..75%) reducing on FIRST or EITHER death:Full level payments are made as long as both the annuitant and joint annuitant are alive. Upon the death of either the annuitant or joint annuitant, reduced (50%…75%) level payments will continue to the survivor for as long he/she is alive.
  • Adding a Period Certain provision to a Joint & Survivor (50%…75%) annuity accomplishes the following: Even if the annuitant or joint annuitant dies before the end of the certain period, payments to the survivor will not reduce until after the end of the certain period (5-25 years). If both the annuitant and joint annuitant die before the end of the certain period, full level payments will be paid to the designated beneficiary until the end of the certain period.
  • Joint & Survivor (50%..75%) reducing ONLY ON DEATH OF PRIMARY ANNUITANT: Full level payments will be made for as long as both the annuitant and contingent annuitant lives. Payments are never reduced to the Primary Annuitant. Payments are reduced to the Contingent annuitant should the Primary Annuitant predecease the Contingent Annuitant. (Note: This form is sometimes called Joint and Contingent annuity. However, be careful, many companies interchange their definitions for Joint and Survivor and Joint and Contingent forms. Verify that your company’s interpretation of a survivor annuity is what you have in mind to purchase.)
  • Adding an Installment Refund provision to a Joint & Survivor (50%…75%) annuity does the following: Full level payments will be made for as long as both the annuitant and contingent annuitant lives. Depending on whether the annuity is of the Joint & Survivor or Joint and Contingent type (see above), payments may reduce upon the death of either annuitant or only if the primary annuitant predecease the contingent Annuitant. However, if both the primary annuitant and joint annuitant should die before receiving in periodic payments an amount equal to the original premium, then the periodic payments continue to be paid to the estate or designated beneficiary until the total payments made (to both annuitants while living and to the beneficiary after the annuitants’ deaths) equals the original premium (usually, without interest).
  • Adding a Cash Refund provision to a Joint & Survivor (50%…75%) annuity does the following: The only difference between this option and the Installment Refund provision is that if both the primary annuitant and joint annuitant should die before receiving in periodic payments an amount equal to the original premium, then the difference between the original premium (usually, without interest) and the periodic payments received during the annuitants’ lifetimes, is paid to the estate or designated beneficiary in a single lump sum.
  • Adding a Period Certain provision to a Joint & Contingent (50%..75) annuity does this: If the annuitant dies before the end of the certain period, payments to the contingent annuitant will not reduce until after the end of the certain period (5-25 years). If both annuitants die before the end of the certain period, full level payments will be paid to the designated beneficiary until the end of the certain period.
  • Joint & Full Survivor (100%): Level payments are made for as long as either the annuitant or joint annuitant is alive.
  • Joint & Survivor (100%) with Certain Period: Adding a Period Certain provision to a Joint & 100% Survivor annuity does this– If both the primary annuitant and joint annuitant should die before the end of the specified certain period (5-25 years), full level payments will be paid to the designated beneficiary until the end of the certain period.
  • Joint & Survivor (100%) with Installment Refund: Adding an Installment Refund provision to a Joint & 100% Survivor annuity does the following– Level payments are received for the annuitants’ lifetimes. However, if both the primary annuitant and joint annuitant should die before receiving in periodic payments an amount equal to the original premium, then the periodic payments continue to be paid to the estate or designated beneficiary until the total payments made (to both annuitants while living and to the beneficiary after the annuitants’ deaths) equals the original premium (usually, without interest).
  • Joint & Survivor (100%) with Cash Refund: Adding a Cash Refund provision to a Joint & 100% Survivor annuity does the following– Level payments are received for the annuitants’ lifetimes. However, if both the primary annuitant and joint annuitant should die before receiving in periodic payments an amount equal to the original premium, then the difference between the original premium (usually, without interest) and the periodic payments received during the annuitants’ lifetimes, is paid to the estate or designated beneficiary in a single lump sum.

Annuitant: A person who is entitled to receive benefits from an annuity.

Beneficiary: A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor.

Exclusion Ratio: The amount of an annuity payment that is not subject to income tax when received, since it is considered to be the return of the original principal.

Owner: The owner is usually the purchaser of the annuity and has all the rights under the contract, subject to the rights of any irrevocable beneficiary. The owner is subject to income tax on all payments made from the annuity, regardless of who is named as payee.