Many people are confused with the meaning of an annuity and exactly what is an annuity. An annuity can mean many things and there are so many kinds of annuities that they deserve explanation. There are fixed annuities, variable annuities, immediate annuities, indexed annuities, life annuities, life with period certain annuities, life with joint survivor benefit annuities and period certain annuities. Even structured settlements are a form of annuity, much like a lottery payout over twenty years is an annuity. Annuities take on two forms as they can have different stages; accumulation stage and distribution phase. If no monies are being paid out on a regular interval, then the annuity is in the form of accumulation. Once monies begin to be paid out to the beneficiary or annuitant or owner, the annuity enters the distribution phase.
What is a Structured Settlement?
A structured settlement is a financial instrument that is negotiated between two parties or financial institution to benefit a claimant to settle a judicial claim because of an injury, be it personal or other. Rather than taking the full sum of money up front, to protect the beneficiary or claimant from spending the money over a short period of time, a settlement payment is made periodically thus insuring that the claimant can only spend a certain amount of money from the total settlement over the period of time chosen at the time of the income stream is created. Structured settlements protect the claimant from himself. In some cases, after the structured settlement is made, the claimant changes his mind and wants to receive a full lump sum of the outstanding balance.
Definition of an annuity during accumulation phase.
Money placed in a fixed, variable or indexed annuity that pays no monthly or no regular interval payment is in the accumulation phase and usually enjoys a tax-sheltered status. In other words, no tax is owed to the IRS on earnings until distribution has begun. In the case that distribution begins, part of the interval payment is considered return of principal and part is considered taxable income. A schedule can be produced that shows the beneficiary or recipient of the annuity payments exactly how much of each payment is considered return of principal and what part is considered return of the now taxable, tax-sheltered growth.
Definition of an annuity under distribution phase.
An annuity during the distribution phase is a string of payments made at equal times; usually monthly, quarterly or yearly. Monthly pension payments, social security payments and any payment that occurs on a regular basis could be considered an annuity. If you win the lottery and choose to be paid out over 20 years, those annual payments would be considered a form of annuity payment as it a regular scheduled payment with a certain period. Here it would be a 20 year annual pay annuity payment with 20 year period certain.
What is a Single Premium Immediate Annuity?
An immediate annuity is an annuity whereas the annuitant gives away a certain amount of principal in return for a guaranteed amount of monthly or yearly payment, usually for the life of the annuitant. The annuitant is the person who receives the monthly payment based on his future life expectancy which is usually based on his or her age, gender and life expectancy. Should the annuitant be very old and sick, the monthly annuity payment would be much higher than normal. Most immediate annuities are paid for at least the life of one person but sometimes can be paid out on the lives of two people, such as a husband and wife. This is known as a joint and life survivor annuity. Should one of the spouses die, the payment will continue to be paid monthly to the second spouse until their demise.
What is a tax-deferred annuity?
A tax-deferred annuity is an annuity that is in the accumulation stage, which means that it’s still growing inside the tax shelter and has not been turned into a steady stream of income yet. Instead, the money grows inside the annuity, tax-deferred, until such time that withdrawals are made or the annuity is annuitized into a monthly stream of income for life to one person, or two people, a joint and last survivor annuity.
What is a fixed annuity?
A fixed annuity is a tax sheltered annuity that pays a fixed rate of interest on the money deposited into the annuity. The money grows tax-deferred until such time that there is a distribution or withdrawal or until the money is turned into a periodic annual income stream. It is then that taxes will be due to the IRS on the amount of growth distributed in each and every tax year going forward until the income stream stops.
What is a Fixed Immediate Annuity?
This is an annuity that immediately begins periodic payments based upon current fixed interest rate markets in the US economy. If interest rates are high at the time of annuitization, the periodic payment will be higher than average, whereas if the current interest rate is low, the periodic payment will be lower than average. The Fixed Immediate Annuity has no direct relationship on the US and World Stock Markets.
What is a Variable Annuity?
A variable annuity is an annuity where funds are placed to grow tax-deferred in sub-accounts that resemble mutual funds, either stocks, bonds or both. Variable annuities grow tax-deferred in the accumulation phase, however, when the annuity is turned into a monthly stream of income, the distribution is taxed on the growth portion of the account balance and taxes are due to the IRS based on the owners income tax bracket.
What is an Indexed Annuity?
An Indexed Annuity is an annuity that ties a stock market index like the S&P 500 to the growth of the annuity while it is the accumulation phase along with a guaranteed minimum growth rate. Generally, Indexed Annuities perform better than fixed annuities but not as good as Variable Annuities. Careful consideration should be taken by clients, based on their risk, as to whether they should invest in either a fixed, variable or indexed annuity. please click here.