Income Annuities.
The ABCs of "Income Annuities" or Single Premium Immediate Annuities .	back to home

What is a Single Premium Immediate Annuity or Income Annuity?

A Single Premium Immediate Annuity or "Income Annuity" is a contract between you and an insurance company. By depositing a lump sum of money, you are guaranteed to receive a series of payments over a period of time. The amount of the payment is determined by both the current interest rate at the time your contract is issued and by choices you make from a wide variety of payment options. Once your contract is issued, your payments are fully guaranteed for the period of time you have chosen.

Tax-Favored Income

If you use after-tax funds to purchase a Single Premium Immediate Annuity or "Income Annuity", a portion of the income payment you receive may be tax free. The tax-free portion of each payment is a level percentage that represents the return of principal over the life of the contract. Depending on your age and the payment option you choose, this percentage will vary. As an example, your monthly income could have an "exclusion ratio" of 90%, meaning 90% of your payment is considered a return of principal and is income tax free. If you use tax-qualified funds (IRA money, for example) to purchase your Single Premium Immediate Annuity, the payments you receive are generally fully taxable as you receive them because they represent funds that have not been taxed before.

Level Payments

Once your contract is issued, you can count on your payments not to change in amount or frequency. You will enjoy the financial security of a guaranteed income. Economic conditions may change, but your payment is guaranteed to remain the same. Most Single Premium Immediate Annuities offers a variety of options so you may tailor your income schedule to suit your needs. You can choose to receive payments monthly, quarterly, semiannually or annually.

The payment options include:

Period Certain Only

Period certain means a specific number of years you choose. Payments will continue for the duration of the number of years you choose, and then cease. If you should die before the end of the stated number of years, your beneficiary would continue to receive the payments for the remainder of those years. If you were to choose a 10 year period certain payout paid to you in monthly installments, and you were to pass away at the end of year seven, your beneficiary would continue to receive the same monthly payment for 3 more years.

Life Only

Payments will continue for the rest of your life. You cannot outlive your income. Upon your death, payments stop.

Life and Period Certain

Life and period certain means payments will continue for the rest of your life, but for no less than the stated number of years. If you should die before the end of the stated number of years, your beneficiary would continue to receive the payments for the remainder of those years.

Life Only with Guaranteed Minimum Option/ Installment Refund

Payments will continue for the rest of your life. If you should die before you have been repaid your initial payment, the balance of your initial payment will be paid in like installments to your beneficiary.

Joint and Survivor

Payments are guaranteed during the lifetimes of two people. After the death of one, payments continue for the lifetime of the surviving person. You can choose to have either full payments, or a percentage you choose, to continue for the lifetime of the survivor. You can also specify a period certain, and if both individuals were to die within the period certain, payments would continue to the named beneficiary for the remainder of the period certain.

Importance Notes: Annuities have limitations. For costs and complete details of the coverage, call or write us. Most insurance companies can provide benefit quotes, but do not give legal, tax or accounting advice in consideration of, or in conjunction with, the purchase of its insurance products.

In an effort to give you an idea of what a deferred or immediate annuity could do for you in retirement, we are providing you with several charts. The series of charts depicts the income produced, based on $100,000, showing male, female, and joint life expectancies. We show the same $100,000 growing at 5%, in increments of five years, and then we show the increased payout based upon the 5 years of growth. We show the "exclusion ratio", which is the portion of your payment that is considered a return of principal, and is excluded from taxation, it is income tax free. In summary, one is able to see accumulation (growth), and annuitization (income), and the portion of the income that would be tax free.

Payout / Exclusion Ratio - 10Yr Period Certain

Looking at the first chart, if you annuitize $100,000 immediately, it would generate $1,013 monthly for 10 years with an exclusion rate of 82.3%. If you defer the $100,000 for 5 years, it will grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $1,304 monthly for 10 years, but the exclusion ratio is 63.9% because of the first 5 years of deferred growth.

This also gives you an idea of how continued deferred growth will affect your monthly payment and the exclusion ratio.

Payout / Exclusion Ratio - Joint Life

Looking at this second chart which is based on joint life expectancy, the male and female are assumed to be the same age. If a married couple, male age 60 and a female age 60 were to annuitize $100,000 immediately, it would generate $534.13 monthly for life, as long as either person is alive, and will not pay any amount to any beneficiary. The $534.13 will have an exclusion rate of 52.5%. If you defer the $100,000 for 5 years, it will grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $732.15 monthly for life, as long as either person is alive, and the exclusion ratio is 45.5% because of the first 5 years of deferred growth.

Payout / Exclusion Ratio - Life Only (Female)

Looking at the third chart, if a female age 60 were to annuitize $100,000 immediately, it would generate $584.94 monthly for as long as the woman lives, with an exclusion rate of 58.9% . If the woman were to defer the $100,000 for 5 years, it would grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $816.78 monthly for life, but the exclusion ratio is now 51.00% because of the first 5 years of deferred growth.

Payout / Exclusion Ratio - Life & 10 (Female)

Looking at the fourth chart, if a female age 60 were to annuitize $100,000 immediately, based on her life expectancy and a guaranteed monthly payment for 10years, it would generate $577.09 monthly for as long as the woman lives, or for 10 years at a minimum, with an exclusion rate of 58.00% . If the woman were to defer the $100,000 for 5 years, it would grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $797.92 monthly for life, or for 10 years at a minimum, but the exclusion ratio is now 49.20% because of the first 5 years of deferred growth.

Payout / Exclusion Ratio - Life Only (Male)

Looking at the fifth chart, if a male age 60 were to annuitize $100,000 immediately, it would generate $618.14 monthly for as long as the man lives, with an exclusion rate of 55.70% . If the man were to defer the $100,000 for 5 years, it would grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $842.12 monthly for life, but the exclusion ratio is now 46.50% because of the first 5 years of deferred growth.

Payout / Exclusion Ratio - Life & 10 (Male)

Looking at the sixth chart, if a male age 60 were to annuitize $100,000 immediately, based on his life expectancy and a guaranteed monthly payment for life and 10years period certain, it would generate $604.85 monthly for as long as the man lives, or for 10 years at a minimum, with an exclusion rate of 55.30%. If the man was to defer the $100,000 for 5 years, it would grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $842.12 monthly for life, or for 10 years at a minimum, but the exclusion ratio is now 46.50% because of the first 5 years of deferred growth.

Male Summary

Female Summary