An
Annuity is a unique financial product that
provides tax deferral of interest and capital gains
and the option of a guaranteed monthly income which
you can not outlive.
Accumulation
Period
During the
accumulation period of an annuity all
premium payments are invested in either a fixed
account also known as a guaranteed account. Your
principal and the interest rate are guaranteed by
the company. Interest rates a usually guaranteed for
one year however increasingly guaranteed annuity
rate are available for longer durations.
Distribution
Period
During retirement
funds can be withdrawn from the contract and the
owner has several options to chose from.
Withdrawals may be made at any time from
the contract, prior to retirement as well, usually
with a minimum dollar amount and at the option of
the owner.
Systematic Withdrawal Plan enables the
owner to pre-authorized periodic withdrawals. The
owners of the contract instructs the company to
withdraw a percentage or a level dollar amount from
the contract on a monthly, quarterly, semiannual, or
annual basis. Checks are sent directly to the owner
or can be deposited directly into the owners
checking account.
Fixed Account
The owner of the
contract may transfer all or part of the value of
the contract to the fixed account, sometimes called
the guaranteed account, and elect to annuitize those
funds. In essence the owner of the contract for a
fixed dollar amount, purchases a monthly income
which will be paid to him/her until death.
For instance a 68
year old male could receive a monthly income which
would be payable to himself as long as he is alive,
or to his beneficiary should he die within the first
10 years. This option is known as "Life Annuity with
Payments for a Guaranteed Period", in this case the
guaranteed period is ten years.
Contracts when
issued include a "payout table" stating the minimum
payout guaranteed by the company based on age and
sex (according to state law). When the contract is
annuitized the payout will be based on the higher
value of the guaranteed amount stated in the
table or the current values used at that time.
In this example
according to the payout table, for every $1,000
which is annuitized under the "Life Annuity with
Payments Guaranteed for 10 Years Option" the monthly
payout would be $5.68. This is what was guaranteed
at the time the contract was issue however the
current payout rate which the company is using is
$7.93. All payout rates are expressed as dollars per
period (monthly, quarterly, semiannually, annually)
per $1,000 dollars.
Therefore if this
individual elected to annuitize $30,000 under this
option his monthly payout would be $237.90 per
month. This dollar amount is guaranteed to be paid
to him as long as he is alive. Should death occur in
the first ten years his beneficiary would receive
the difference between 10 year of monthly income and
the amount he actually received.
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