Immediate annuity Annuity (American)

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1 immediate annuity

1.1 annuity period certain
1.2 life annuity

1.2.1 life annuity variants







immediate annuity

the term annuity, used in financial theory, closely related today called immediate annuity. insurance policy which, in exchange sum of money, guarantees issuer make series of payments. these payments may either level or increasing periodic payments fixed term of years or until ending of life or 2 lives, or whichever longer. possible structure payments under immediate annuity vary performance of specified set of investments, bond , equity mutual funds. such contract called variable immediate annuity. see life annuity, below.


the overarching characteristic of immediate annuity is vehicle distributing savings tax-deferred growth factor. common use immediate annuity might provide pension income. in u.s., tax treatment of non-qualified immediate annuity every payment combination of return of principal (which part not taxed) , income (which taxed @ ordinary income rates, not capital gain rates). immediate annuities funded ira not have tax advantages, typically distribution satisfies irs rmd requirement , may satisfy rmd requirement other ira accounts of owner (see irs sec 1.401(a)(9)-6.)


when deferred annuity annuitized, works immediate annuity point on, lower cost basis , more of payment taxed.


annuity period certain

this type of immediate annuity pays annuitant designated number of years (i.e., period certain) , used fund need end when period (for example, might used fund premiums term life insurance policy). person may outlive number of years annuity pay.


life annuity

a life or lifetime immediate annuity used provide income life of annuitant similar defined benefit or pension plan.


a life annuity works loan made purchaser (contract owner) issuing (insurance) company, pays original capital or principal (which isn t taxed) interest and/or gains (which taxed ordinary income) annuitant on life annuity based. assumed period of loan based on life expectancy of annuitant. in order guarantee income continues life, insurance company relies on concept called cross-subsidy or law of large numbers . because annuity population can expected have distribution of lifespans around population s mean (average) age, dying earlier give income support living longer money otherwise run out. form of longevity insurance (see below).


a life annuity, ideally, can reduce problem faced person when don t know how long live, , don t know optimal speed @ spend savings. life annuities payments indexed consumer price index might acceptable solution problem, there thin market them in north america.


life annuity variants

for additional expense (either way of increase in payments (premium) or decrease in benefits), annuity or benefit rider can purchased on life such spouse, family member or friend duration of life annuity wholly or partly guaranteed. example, common buy annuity continue pay out spouse of annuitant after death, long spouse survives. annuity paid spouse called reversionary annuity or survivorship annuity. however, if annuitant in health, may more advantageous select higher payout option on or life , purchase life insurance policy pay income survivor.


the pure life annuity can have harsh consequences annuitant dies before recovering or investment in contract. such situation, called forfeiture, can mitigated addition of period-certain feature under annuity issuer required make annuity payments @ least number of years; if annuitant outlives specified period certain, annuity payments continue until annuitant s death, , if annuitant dies before expiration of period certain, annuitant s estate or beneficiary entitled remaining payments certain. tradeoff between pure life annuity , life-with-period-certain annuity annuity payment latter smaller. viable alternative life-with-period-certain annuity purchase single-premium life policy cover lost premium in annuity.


impaired-life annuities smokers or particular illness available insurance companies. since life expectancy reduced, annual payment purchaser raised.


life annuities priced based on probability of annuitant surviving receive payments. longevity insurance form of annuity defers commencement of payments until late in life. common longevity contract purchased @ or before retirement not commence payments until 20 years after retirement. if nominee dies before payments commence there no payable benefit. drastically reduces cost of annuity while still providing protection against outliving 1 s resources.







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