An annuity is a policy contract that agrees to pay the insured a regular income over a specified period of years. The payments one makes for an annuity are referred to as premiums. The person who receives payments from the annuity is the annuitant.
With a deferred annuity, the contract specifies a future date that payments to the annuitant will begin. This date is referred to as the maturity date. The period before the maturity date on a deferred annuity is sometimes called the accumulation period.
Period certain refers to a guarantee from the insurance company that it will make annuity payments to a beneficiary for a specific number of years, even if the annuitant dies before the end of this period.
The refund option is another form of guarantee offered by insurance companies. This option provides that in the event of the annuitant's death, the company will pay out an amount at least equal to the total dollars paid in as premiums.
Refund options can be classified into two basic types. With a cash refund, the insurance company agrees that if the annuitant dies, it will refund, in cash, the difference between the income that annuitant received and the amount paid in premiums, plus interest earned. With an installment refund, the insurance company agrees to continue to make periodic payments to the annuitant's beneficiary until the total of the payments made to the annuitant and to the beneficiary equals the amount the owner paid for the annuity contract, plus interest earned.
When an individual surrenders a contract, he or she turns in to the insurance company the documents stating the contract terms. In return, the company gives the owner a sum of money known as the surrender value.
Some annuity contracts offer loan privileges, whereby the policy owner may borrow against the contract rather than accept a distribution of cash. This may be advantageous in some cases; however, the loans carry interest charges that vary according to company regulations. Furthermore, a policy loan is considered taxable income.
One important mathematical device insurance companies use for pricing annuities is a mortality table. Therefore, the death benefit to surviving annuitants will grow larger each year during the liquidation period. If the annuitant lives long enough, both principal and interest eventually will be exhausted. When that occurs, the entire payment will come from the insurance benefit.
A guaranteed income is only one factor that investors must take into account when considering annuities. Among the other issues that should be examined are risk, liquidity, earnings and taxes.
The fixed income received from an annuity loses its value in times of inflation. A desirable feature that a discerning buyer will seek in an annuity is the bailout provision. With this provision, the contract owner may bail out without paying any surrender charge if the rate falls below a certain designated percentage from the original rate, even if the initial guarantee period has expired.
The fixed account offers guaranteed safety of principal and specifies a fixed interest rate. In order for the insurance company to begin paying out income from the annuity, accumulation units are converted into annuity units. Income taxes will not affect this personal fund during the accumulation period; it is only when money is withdrawn that taxes become due.
Legacy Insurance Agency offers fixed and equity indexed annuity products from Allianz, American Equity, Aviva, EquiTrust, Guardian, ING, Mass Mutual, Midland National, MTL, Old Mutual and Shenandoah Life.
To find out more or schedule an appointment please call us at (228) 875-5545
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