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What Is An Annuity Anyway?
An annuity is a contract between you and a life insurer. You purchase an annuity with a single premium payment or a series of premiums, and at distribution, the insurer agrees to make a series of payments over time.
There are fixed and variable annuities. In a fixed annuity the issuer guarantees payment of both principle and interest. In a variable annuity, the value of this account can fluctuate up and down with changes in the market value of the underlying securities that are owned. With variable annuities, you can choose among many investment portfolios and easily change your investment approach as your needs change1.
There are two stages to an annuity: First, the accumulation stage, during which premiums paid (less any applicable charges) accumulate interest as set by the company. Second, the distribution stage, when the income payments are paid out to you. These income payments can be guaranteed for life or for a specific period of time2. You may choose to withdraw your money in a lump sum or you can elect to convert your annuity into a long-term income plan (also called "annuitizing").
Your annuity accumulates interest on a tax-deferred basis - it's taxable upon withdrawal. So long as there is a balance in the annuity, interest accrues on a tax-deferred basis for the life of the annuity.
An annuity can be a very flexible component of your retirement plan. It can provide the security of a consistent flow of income that cannot be outlived. And with all the options available, you can tailor an annuity to best suit your own specific situation.
Payments from an annuity contract have been held to be generally taxable upon distribution. Payments received prior to age 59 1/2 may incur an additional 10% distribution penalty for early distribution: IRC Sec. 72.
Consult your tax advisor or attorney on your specific situation.
There are deferred and immediate annuities. Deferred annuities are purchased over a period of time with either a single payment or series of contributions and accumulate to an amount that is paid back to you later. Immediate annuities are the opposite: you make an initial lump sum premium payment and the annuity provides you with regular payments of income for a period of time.
Deferred Annuities
Deferred annuities may suit individuals who are saving now and want the safety of a guaranteed rate of return.
There are two kinds of deferred annuities.
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Single Premium Deferred Annuity (SPDA) –
This is purchased with a one-time lump sum single premium payment, usually $2,000 or more. An SPDA may suit someone who is ten or less years away from retirement and needs to accumulate funds at a faster rate.
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Flexible Premium Deferred Annuity (FPDA) –
This lets you make additional payments into your account after the first premium, either on a regular monthly basis or from time to time as your circumstances allow. An FPDA may suit someone who is ten or more years away from retirement and wants to spread premiums out over time.
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Immediate Annuities
Immediate annuities are also called a Single Premium Immediate Annuity (SPIA). With immediate annuities, you pay a lump sum premium and the annuity provides an income stream immediately. You can choose how often you want to receive your income payments: monthly, quarterly, semi-annually or annually.
Immediate annuities may suit people who are near or already retired and want to fix the amount of income they will have every month. They are also suitable for ensuring regular income from the proceeds of life insurance.
Annuity Options
You can choose to receive payments from your annuity monthly, quarterly, semi-annually, or annually. Those payments can be made through a variety of settlement options, including:
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"Life Only" guarantees that you will always have an income no matter how long you live. Once you die, the insurer retains the balance, even if it hasn't been fully paid out to you.
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"Period Certain" guarantees payments for a specified amount of time, from 5 to 20 years or even more. If you die within that time, payments continue for the entire period to the beneficiary you designate.
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"Life Income with Period Certain" combines both of the above. For example, if you select a 15-year payout period, and you die in Year Ten, payments continue to your beneficiary for 5 more years. If you live more than 15 years, the payments continue until you die, no matter how many years that may be.
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"Joint and Last Survivor" guarantees payments to you or to another person, whoever lives longer.
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"Joint and Last Survivor with Period Certain" guarantees payments for a period of time or until both annuitants die, whichever occurs last. If there is still time on the selected period, payments continue to a beneficiary until the end of the period.
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How do you go about choosing an annuity? Ask your Foresters representative to help. You'll not only have someone with whom you can discuss annuities. You'll also have someone who will take a personal interest in looking out for you and help you plan your future.
Investments are offered through Foresters Equity Services, Inc. - Member NASD, SIPC, 6640 Lusk Blvd Suite A-202, San Diego, CA 92121, A wholly owned subsidiary of The Independent Order of
Foresters.
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