An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date, of your principal and earnings.
One of the biggest advantages of an annuity, is that it may offer a tax-deferred growth of earnings, and are generally used to provide income at retirement. Another attractive feature of annuities is that generally, in many states (including Florida) Annuities are “creditor proof”.
There are many different kinds of annuities, however the most common can be classified as either a Fixed Annuity, Equity-Indexed Annuity, SPIA, or SPDA.
In a fixed annuity, your money grows at a fixed interest rate, as set by the insurance company, during the elected length of time. The size of your payments are determined by a variety of factors including the length of your payment period. These periodic payments may last for a definite period, such as 5 years, 10 years, 20 years, or they may last an indefinite period, such as your lifetime or the lifetime of you and your spouse.
An equity-indexed annuity is a special type of annuity. During the accumulation period, when you make either a lump sum payment or a series of payments, the insurance company credits you with a return that is tied to an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.
Fixed Annuities An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.
Single Premium Immediate Annuities (SPIA) Single Premium Immediate Annuities (SPIAs) are purchased with a single premium deposit. As the name implies, the annuity usually start making regular scheduled payments to you immediately after you turn over the funds to the insurance company. Typically this means 30 days from the date of deposit; but within certain limits you can also to defer the date that payments begin.
Single Premium Deferred Annuities (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 a 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.
A special class of annuities that yields returns on your contributions based on a specified equity-based index. These annuities can be purchased from an insurance company, and similar to other types of annuities, the terms and conditions associated with payouts will depend on what is stated in the original annuity contract.
Insurance companies commonly offer a provision of a guaranteed minimum return with indexed annuities, so even if the stock index does poorly, the annuitant will have a limited downside conversely an annuitant’s yields may be somewhat lower than expected due to the combination of caps on the maximum amount of interest earned and fee-related deductions.