Annuities can be deferred and immediate annuities. Deferred annuity is designed for an investor who wants to contribute and accumulate money so that he’ll receive a significant payout when he retires. His contributions are tax-sheltered until he decides to withdraw from his annuity account. It is possible for him to move his money from an investment account to his annuity account. This way, he already has a large contribution which will be followed by smaller contributions periodically.
Immediate annuity, on the other hand, allows a person to contribute a lump sum then starts receiving regular payouts, either in variable or fixed amounts. This type of annuity is designed for people who have received a large amount of money like inheritance or lottery winnings.
In deferred annuity, every contribution is tax-sheltered, which means that the annuitant isn’t taxed on his contributions to his annuity account. In addition, capitals gains are also not taxable during the accumulation phase. These tax savings are compounded over time and can substantially boost returns. Furthermore, when a person retires, he’ll move lower in the tax bracket. This translates to lower tax rates and higher after-tax returns on his investments.
In essence, an annuity’s goal is to offer stable income over the long term for the annuitant. By deciding when the payouts will commence, the insurance company ensures that money will be available when the annuitant starts receiving the distribution. In ensuring that there is money for the payouts, the insurance company takes into account the present currency value of the annuity account, the annuitant’s present age, the expected inflation-adjusted returns in the future, and the annuitant’s life expectancy. Lastly, any spousal provision is also factored in the computation.
Annuitants opt to receive monthly payouts until they die. Many people who have bills to pay prefer to sell their annuity payments on Washington Accord. If an annuitant dies, their spouses continue to receive the payouts until they also die. The total amount of payouts is more than the total amount of contributions. However, if the annuitant dies early, he will receive less than his total amount of contributions.
In addition, the insurance company operates on certainty thus annuities are priced in a manner by which it will still have more funds than the total payouts it distributes to its annuitants. Moreover, annuitants are certain to receive a guaranteed amount of payouts. In general, if the annuity contract has more guarantees, the monthly payouts will be smaller.
Some annuitants want a secured and risk-free retirement income while some the rest of them may be more concerned about their annuity’s capital gains. A fixed annuity provides a fixed monthly payout for the rest of the annuitant’s life. However, the annuitant can’t take advantage of extra gains from his annuity account. A variable annuity, on the other hand, allows an annuitant to take advantage of his fund’s capital gains while being able to withdraw from his account. The insurance company guarantees a minimum monthly income and also provides the means for the annuitant to receive any excess fluctuating amount based on his fund’s performance. The annuitant receives more money if his annuity account generates high returns and less money if its performance is not at par.