1. 37376 POINTS
    David G. Pipes, CLU®, RICP®PRO
    Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
    There are two basic classifications of annuities, immediate and deferred. The immediate annuity provides income payments over the lifetime of the annuitant starting within one year of the deposit. The deferred annuity doesn’t start payments until a later date.

    Deferred annuities may increase in value over time. That increase is not subject to income tax as it occurs. This deferral of taxation is a major attraction of annuities.

    A deferred annuity can be either a single premium annuity or a flexible annuity. As a single premium annuity it is often used to augment retirement income at a later date, when other streams of income may have ceased. It is often used to anticipate increases in inflation, providing a much needed boost in income.

    As a flexible deferred annuity the contract allows the owner to make deposits on either a scheduled or unscheduled basis into the policy. As mentioned previously earnings on the contract are not taxed in the years that the money is accumulating.

    A deferred annuity can be classified into three major groups. The first would be the fixed annuity, the second would be the variable annuity and the third would be the indexed annuity.

    The fixed annuity is issued by an insurance company. The owner makes at least one deposit and everything that takes place later is the responsibility of the insurance company. The company guarantees the growth and guarantees the future payments. There isn’t any market risk in this policy.

    A variable annuity, while structured similarly by the insurance company that issues it, allows that the owner can select the funds that will accumulate to provide future benefits. In some cases it may extend the privilege of selecting underlying funds into the annuitization phase which will result in uneven results but has the potential of exceptional growth.

    An index annuity lies somewhere in between. The index annuity is designed by the insurance company but rather than paying a guaranteed rate of interest, bases interest payments on the performance of one of the leading market indicators. Commonly these policies are linked to the Dow Jones Average or the Standard and Poor’s index. The annuity has restrictions on the amount of interest credited. The interest rate can either be capped at a preset percentage or the policy can be written so that only a percentage of the rate is applied to the money in the annuity. The trade-off comes when the company guarantees a minimum rate of interest. That minimum rate is often 0%. What this means is that the annuity can participate somewhat in the increases experienced in the stock market without the risk of losing anything. This is quite attractive and currently very popular.

    An aspect of all annuities that is often overlooked is that they are not subject to probate. That means that as a contract the value of the annuity passes to a designated beneficiary without the expensive and time consuming process known as probate.

    Taxation of annuities is another subject but it is important to know where the annuity is going to be “held” to determine its taxation.
    Answered on October 2, 2014
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