An immediate annuity is a product that is sold by insurance company institutions that is designed to payout funds for a life time or set period of time to an individual. A persons money is annuitized, and a stream of payments to the individual start and continue for a lifetime or a set number of years. Annuities in general are basically used as a means of securing a steady flow of monthly checks for an individual during their retirement years. It is important to know how an annuity works in the first place before digging deeper into the details of what it entails. There are different kind of annuities, four to be exact. There is the fixed, immediate, variable and market value adjusted indexed annuities. It is appropriate to know what each annuity entails for the sake of those in their youth who want to find out before their retirement or those who have parents or spouses who are about to retire.
Fixed annuities are popular for those individual who want a guaranteed interest rate percentage and steady flow of monthly payout checks that last a lifetime. The principal investment and specified interest rate are guaranteed with a fixed annuity. The features are a minimum investment risk exposure, you will have a tax deferral on earnings, you can get access to your money and death benefits can be accessed by appropriate beneficiaries.
Immediate annuities are long-term, tax-deferred contracts that you purchase from an insurance company that provide instant regular payments in exchange for a one time investment. For an immediate annuity, one begins to immediately receive monthly, quarterly or yearly checks soon after they purchase it. There are features of immediate annuities to consider. Immediate annuities are usually purchased with a single upfront payment or premium, premiums are not taxed until they withdraw their money. Earnings are only taxed as ordinary income. The payout options that you can choice include: Lifetime payments or specified number of years. The guarantees are subject to the financial strength of the issuing insurance company. Death benefits can be Life or Joint Life Only, Cash Refund, Installment Refund, or Period Certain.
The indexed market value adjusted annuities are also known as modified guaranteed annuities. They offer a flexible avenue of various guarantee terms as well the potential of high interest rates than traditional fixed investments. These are long term contracts designed to help you to save for your retirement. Its features include a choice of guarantee terms and interest rates may be higher than traditional fixed investment offerings. A market value adjustment may apply to any withdrawal made prior to the maturity of a guarantee term.
Variable annuities may offer a great variety of investment choices and taxation on investment growth may be deterred but it has a number of shortcomings. First of them is that tax deferred growth would ultimately be taxed. Variable annuity investment accounts carry much higher fees and expenses due to insurance and contract charges. Surrender fees may be substantial and may continue for years. In this kind of annuity guaranteed death benefits generate mortality charges that may cause the reduction of investment returns. When distributed all gains are taxed as ordinary income tax rates, not at capital gain rates.