While life insurance proceeds are paid at the time of death of the insured, the proceeds of an annuity can provide you with an income for as long as you live. There are two types of annuities:
The first is when you pay a lump sum to a life insurance company, and they pay it out to you right away in periodic installments. This type is known as an immediate annuity – the payments to you start immediately.
The second, and more common, is where money paid by you accumulates with interest over a period of time. If you choose, the accumulated amounts will then be paid out to you in periodic installments, usually when you retire, in order to supplement your retirement income. This type is known as a deferred annuity – the payments to you are deferred for a number of years. Currently, a deferred annuity may have tax advantages, in that the interest credited to your funds is deferred from current taxation. That is to say, income tax is not owed until you start receiving distributions from the annuity.
Both types of annuities offer you certain options for receiving your income. It is usually paid to you monthly. The most common options are:
Period Certain Annuity – The company will pay you an income for a specified amount of time (5 years, 10 years, 20 years, etc.).
Life Annuity with Period Certain -The company will pay you an income for as long as you live, but if you die before the period certain that you choose, the income will be paid to a survivor you designate until the end of that period.
The company will pay an income to you during your life, and after your death will pay a percentage of that income (50% or 75%, for example) to a survivor you designate during his or her life.
In recent years, there has been an increasing emphasis on deferred annuities. If you are going to make an informed choice when you buy a deferred annuity, you need to understand which kinds are available. If one type does not seem to fit your needs, find out about the other contracts that are described in this guide. If you need more information than is given here, you should check with a life insurance agent or company, or consult books on life insurance which are available at your public library. Also, the California Department of Insurance (CDI) has a toll-free Hotline listed in this guide to assist you.
Choosing the Type of Deferred Annuity
Fixed Annuities guarantee that your money will accumulate at a minimum specified rate of interest. However, the company will pay you a higher rate of interest if its investment experience is better than the minimum guarantee.
differ from fixed annuities in that contract owners direct the distribution of their money among several different accounts and their accumulated funds reflect the experience of those accounts rather than that of the company. Typical account choices are common stock, bond, mortgage or money-market accounts. If the value of the accounts increases or ount accumulated. Variable annuities are more risky to the contract owner than fixed annuities, but there is a possibility of greater returns. Other types of deferred annuities combine the characteristics of fixed and variable annuities.
Annuities are sometimes sold as alternatives to investment vehicles such as certificates of the website deposit, money market accounts, mutual funds, etc. There are differences between these products. If you die during the surrender charge period, the surrender charges are deducted from the amount the beneficiary receives. You should consult with your investment and/or tax advisor before making any decisions on purchasing this product.If you die during the accumulation phase of a deferred annuity, an amount usually at least equal to the amount you have accumulated will be paid to your beneficiary. If you cancel the contract, or take some money out of it, there may be surrender charges deducted from the accumulation value. It is usually not a good idea to purchase a deferred annuity unless you are planning to keep it for more than just a few years.