The ABCs of Single Premium Immediate Annuities.
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.
Distributions are subject to ordinary income tax and, if taken prior to age 59½, a 10% federal penalty tax may apply.
- Not FDIC insured ● May lose value ● No bank or credit union guarantee ● Not a deposit ● Not insured by any federal government agency or NCUA/NCUSIF