A single-premium immediate annuity (SPIA), its name descriptive of its function, provides that payments to the annuitant commence immediately after the insurer has received a single (typically large) premium payment. SPIAs are often used by those who have large sums of money and desire to have the fund liquidated for retirement income purposes. These funds may have been accumulated through personal investments, through savings, or from a lump-sum distribution under a pension or other employer-sponsored retirement plan. Life insurance death proceeds are often paid out in installments via an SPIA. Commonly, one envisions such installments as being paid under a life insurance policy settlement option provision that itself is an earmarked SPIA. The beneficiary’s financial interest, however, may be better served by receiving the death proceeds as a lump sum, then shopping carefully for an SPIA. [Read more...]
What is Single Premium Deferred Annuity?
The name of the single-premium deferred annuity (SPDA) is truly descriptive, as it is a deferred annuity contract purchased with a single premium. As with the FPDA, a minimum stated rate of interest is guaranteed for the duration of the contract, but most insurers credit competitive market rates. The rate actually credited is a function of the insurer’s current investment earnings rate and its desired competitive posture in the market, and it is subject to change by the insurer, just as with the FPDA. The current rate may be guaranteed for a single year or for as many as three or more years generally, the longer the guarantee period, the lower the rate. Many insurers follow a tiered rate approach wherein the first tier of funds received (e.g., $25,000) is credited with one interest rate, and funds received in excess of this tier are credited with a somewhat higher rate (e.g., 0.25 percent higher). Some companies have as many as four tiers, each of which attracts a higher rate. [Read more...]
What is Flexible Premium Deferred Annuity?
The flexible-premium deferred annuity (FPDA), one of the most popular individual annuity contracts, permits the contract owner to pay premiums at whatever time and in whatever amount he or she wishes, subject to insurer minimums. It provides for the cash value to be applied at some future time designated by the contract owner to supply an income, if elected, for the annuitant. Within the United States, Canada, and many other countries, interest credited on the cash values of personally owned annuities is not taxable to the contract owner as long as it remains on deposit with the insurance company. On liquidation, annuity payments are taxable as ordinary income to the extent that each payment represents previously untaxed income. Obviously, the tax-deferred nature of cash accumulations under such annuities represents a significant privilege that is justified as an instrument for encouraging individuals to provide for their retirement needs. Tax laws impose certain restrictions on annuity withdrawals prior to retirement to ensure that this privilege is not abused. [Read more...]
Classification of Annuities
Despite the difference in function, annuities are simply another type of insurance, and both life insurance policies and annuities are based on the same fundamental principles. Pooling underlies both, and premiums in each case are computed on the basis of probabilities of death and survival as reflected by mortality tables. [Read more...]
What are Annuities?
Annuities are exceedingly popular as a means of personal savings in the United States and are becoming more prominent in numerous other markets worldwide. This popularity reflects the continuing aging of populations, lagging confidence in government- sponsored retirement programs, and a concomitant desire to increase savings through a tax-favored vehicle in anticipation of retirement financial needs. Changing demographics, especially in the OECD countries, suggests the possibility of still greater annuity demand as today’s baby boom generation (those who will begin retiring around the year 2010) allocates further amounts to retirement savings. [Read more...]
