Words for the Week: Annuity / Annuitize / Annuitant
The term "annuity" refers to an insurance contract issued and distributed by financial institutions with the intention of paying out invested funds in a fixed income stream in the future. Investors invest in or purchase annuities with monthly premiums or lump sum payments. The holding institution issues a stream of payments in the future for a specified period of time or for the remainder of the annuitant's life. Annuities are mainly used for retirement purposes and help individuals address the risk of outliving their savings. In short, Annuities generally can provide a fixed or variable lifetime income that you will not outlive. The Process of setting up the contract with the insurance company is known as Annuitization, or to Annuitize your contract. The receiver of the income stream is known as the Annuitant. The owner of the contract usually is but may not be the annuitant. Annuity contracts are either owner driven or annuitant driven.
A reason why many people purchase an Annuity is for the Tax Deferral as it grows. The earnings in an annuity purchased with after tax dollars is an after tax annuity and the earnings or growth are not taxed as earned but are deferred until paid out. The most common types of annuities that people purchase are Fixed, Variable, and Indexed. We will cover the differences of of those with specific input from questions presented by the blog readers.
Many Lotteries or Sweepstakes are paid out over a period of 20,30,or 40 years. That means they are a period certain Annuity. A prize of $1,000,000 (1 Million) when paid out over a 20 year period would be $50,000 per year for 20 Years. Equaling a total payout of $1,000,000. That is one of the reasons why the "cash" option on many prizes is less than the amount of the gross winnings.
Structured Settlements are often paid out as an Annuity. There are companies who purchase structured legal settlements at a discounted greatly reduced price.
Social Security Income (SSI) is a like a lifetime "Annuity" that pays out for your lifetime. There is not a "cash" option and payments are based on your years of contribution and the income that you paid Social Security taxes on. The payments are guaranteed for your lifetime, and can be increased based on a COLA (Cost of Living Adjustment). It differs from a traditional Annuity contract in that the income paid to you is not entirely dependent on the amount of your contributions.
Many people purchase an annuity contract for their IRA, TSA, or 401(K). There is no additional tax deferral benefit of purchasing one for your retirement plan. The main reason why people buy on for these plans is some of the additional Riders or benefits that may be able to be added to the contract. We will discuss those with more detailed specifics with your submission of questions.
If you have purchased an annuity and you have questions about your Annuity Contract we will be happy to review it with you and discuss it with you. This blogs is a generalized discussion of the terms, Annuity, Annuitize, and Annuitant. It is not meant to be all encompassing and in-depth or a recommendation on your specific annuity or needs.
Please email or contact us for more specific information on your circumstances. Please send comments and Questions.
Words for Next week. National Flat Tax, National Sales tax. (some real Controversy regarding those words recently)