What is an Annuity?
An annuity is a contract between you (the purchaser or owner) and an insurance company. In its simplest form, you pay money to an annuity issuer, and the issuer then pays the principal and earnings back to you or to a named beneficiary.
Two basic annuity concepts:
- Immediate annuity – income stream begins immediately upon payment of the first premium
- Deferred annuity – income stream begins later (or not at all, at the owner’s discretion)
Types of Annuities:
Single Premium Deferred Annuity (SPDA) - A deferred annuity purchase having one lump-sum premium payment. Single-premium deferred annuities offer the tax benefit of increasing in value tax-free until distribution takes place. Thus, an investor could pay a large single premium, have the investment build up free of taxes for a period of years, and then receive partially taxable annuity payments at retirement. A single-premium deferred annuity is more flexible than an individual retirement account, but unlike contributions by some individuals to an IRA, a premium to purchase a deferred annuity is not deductible for tax purposes.
Flexible Premium Deferred Annuity (FPDA) - A type of deferred annuity allowing flexible premium payments after the initial premium has been paid. An annuity that accepts periodic contributions, which can usually be made at any time (as opposed to single premium). A deferred annuity contract that allows the owner to make continual payments. The amounts and times of these payments are often left completely up to the owner. Interest is paid from the date they are received and the amount available to annuitize is dependent on when and how much is received. It can be purchased with a series of regular payments over a period of time. The investor is usually allowed to change the amount or frequency of payments, subject to minimum annual amounts.
Single Premium Immediate Annuity (SPIA) – An immediate annuity makes income payments immediately, or very soon after purchase.
Split/Combo SPDA & SPIA - Splits annuity premium into two separate annuities, one immediate, one deferred allowing income for a period of time (SPIA) and lump sum invested in an SPDA designed to grow back to its original value.
Indexed Annuity - An indexed annuity is a deferred annuity whose return is tied to the performance of a particular equity market index. Your investment principal is usually protected against severe market downturns, you may have an annual return of 0% but not less than 0%. However, earnings are generally capped at a fixed percentage, so any index gains that are above the cap are not reflected in your annual return. Indexed annuity contracts generally require you to commit your assets for a particular term, such as 5, 10, or 15 years. Some but not all contracts limit your participation rate, which means that only a percentage of your premium has a potential to earn a rate higher than a guaranteed rate.
Variable Annuity Assets are invested in separate accounts which are subject to market fluctuations allowing the value to be worth more or less than the original premium investment.
Confused which annuity may be best for your client? Call PIPAC LIFE Brokerage, we are here to help, 866.452.3670 or email at sales@pipaclife.com .
