Income Annuities What is a Single Premium Immediate Annuity or Income Annuity? A Single Premium Immediate Annuity or "Income Annuity" is a contract between you and an insurance company. By depositing a lump sum of money, you are guaranteed to receive a series of payments over a period of time. The amount of the payment is determined by both the current interest rate at the time your contract is issued and by choices you make from a wide variety of payment options. Once your contract is issued, your payments are fully guaranteed for the period of time you have chosen. 
Tax-Favored Income
If you use after-tax funds to purchase a Single Premium Immediate Annuity or "Income Annuity", a portion of the income payment you receive may be tax free. The tax-free portion of each payment is a level percentage that represents the return of principal over the life of the contract. Depending on your age and the payment option you choose, this percentage will vary. As an example, your monthly income could have an "exclusion ratio" of 90%, meaning 90% of your payment is considered a return of principal and is income tax free. If you use tax-qualified funds (IRA money, for example) to purchase your Single Premium Immediate Annuity, the payments you receive are generally fully taxable as you receive them because they represent funds that have not been taxed before. Level Payments
Once your contract is issued, you can count on your payments not to change in amount or frequency. You will enjoy the financial security of a guaranteed income. Economic conditions may change, but your payment is guaranteed to remain the same. Most Single Premium Immediate Annuities offer a variety of options so you may tailor your income schedule to suit your needs. You can choose to receive payments monthly, quarterly, semiannually or annually. Click here to contact me if you would like to see a sample illustration for your personal situation, or continue reading to learn more. 
Payment options include: Period Certain Only
Period certain means a specific number of years you choose. Payments will continue for the duration of the number of years you choose, and then cease. If you should die before the end of the stated number of years, your beneficiary would continue to receive the payments for the remainder of those years. If you were to choose a 10 year period certain payout paid to you in monthly installments, and you were to pass away at the end of year seven, your beneficiary would continue to receive the same monthly payment for 3 more years. Life Only
Payments will continue for the rest of your life. You cannot outlive your income. Upon your death, payments stop. Life and Period Certain
Life and period certain means payments will continue for the rest of your life, but for no less than the stated number of years. If you should die before the end of the stated number of years, your beneficiary would continue to receive the payments for the remainder of those years. Life Only with Guaranteed Minimum Option/ Installment Refund
Payments will continue for the rest of your life.If you should die before you have been repaid your initial payment, the balance of your initial payment will continue to be paid in like installments to your beneficiary. Another way to view income planning is to consider it a "Guaranteed Paycheck for Life".
Consider Diane:Asingle woman who is a sole provider and 75 years of age.
Diane's available assets include several fixed-interest bearing investments, and her tax bracket is 25%.Diane has been retired for 10 years, and is a widow. Diane tells her advisor that she is living only on the earnings from her fixed-interest bearing investments.Shestates that she has had limited success, and fears that inflation and rising healthcare costs will negatively impact her retirement income. Diane still wishes to avoid the stock market due to market volatility and the potential for loss. In order to maximize her after-tax income and provide a more comfortable lifestyle, Diane could move $150,000 from one of her fixed-interest investments into an income annuity. In the event of her death, payments will continue to her beneficiary until the original premium is returned, without involving the costs and delays associated with probate. 
The new plan provides Diane with monthly payments of approximately $1,024- guaranteed for her lifetime. This is an increase of $544 per month. In addition, if Diane passes away before the contract value of $150,000 has been paid, her beneficiaries will continue to receive the monthly payment until the contract value has been paid out. The point is, there is a menu of savings and investment options beyond stocks, bonds, mutual funds, or CDs. The point of this section on income planning is to re-orient seniors, boomers, or anyone saving for retirement on retirement planning matters, in both the accumulation phase and in the distribution phase. Joint and Survivor
Payments are guaranteed during the lifetimes of two people. After the death of one, payments continue for the lifetime of the surviving person. You can choose to have either full payments or a percentage of the payment (for example 50%, 66%, or 100%) to continue for the lifetime of the survivor. You can also specify a period certain, and if both individuals were to die within the period certain, payments would continue to the named beneficiary for the remainder of the period certain. Important Notes: Annuities have limitations. For costs and complete details of the coverage, call or write us. Most insurance companies can provide benefit quotes, but do not give legal, tax or accounting advice in consideration of, or in conjunction with, the purchase of its insurance products. In an effort to give you an idea of what a deferred or immediate annuity could do for you in retirement, we are providing you with several charts. The series of charts depicts the income produced, based on $100,000, showing male, female, and joint life expectancies. We show the same $100,000 growing at 5%, in increments of five years, and then we show the increased payout based upon the 5 years of growth. We show the "exclusion ratio", which is the portion of your payment that is considered a return of principal, and is excluded from taxation. It is income tax free. In summary, one is able to see accumulation (growth), and annuitization (income), and the portion of the income that would be tax free. 
Payout / Exclusion Ratio - 10Yr Period Certain
Looking at the first chart, if you annuitize $100,000 immediately, it would generate $1,013 monthly for 10 years with an exclusion rate of 82.3%. If you defer the $100,000 for 5 years, it will grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $1,304 monthly for 10 years, but the exclusion ratio is 63.9% because of the first 5 years of deferred growth. This also gives you an idea of how continued deferred growth will affect your monthly payment and the exclusion ratio. 
Payout / Exclusion Ratio - Joint Life
Looking at this second chart which is based on joint life expectancy, the male and female are assumed to be the same age. If a married couple, male age 60 and a female age 60 were to annuitize $100,000 immediately, it would generate $534.13 monthly for life, as long as either person is alive, and will not pay any amount to any beneficiary. The $534.13 will have an exclusion rate of 52.5%. If you defer the $100,000 for 5 years, it will grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $732.15 monthly for life, as long as either person is alive, and the exclusion ratio is 45.5% because of the first 5 years of deferred growth. 
Payout / Exclusion Ratio - Life Only (Female)
Looking at the third chart, if a female age 60 were to annuitize $100,000 immediately, it would generate $584.94 monthly for as long as the woman lives, with an exclusion rate of 58.9%. If the woman were to defer the $100,000 for 5 years, it would grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $816.78 monthly for life, but the exclusion ratio is now 51.00% because of the first 5 years of deferred growth. 
Payout / Exclusion Ratio - Life & 10 (Female)
Looking at the fourth chart, if a female age 60 were to annuitize $100,000 immediately, based on her life expectancy and a guaranteed monthly payment for 10 years, it would generate $577.09 monthly for as long as the woman lives, or for 10 years at a minimum, with an exclusion rate of 58.00% . If the woman were to defer the $100,000 for 5 years, it would grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $797.92 monthly for life, or for 10 years at a minimum, but the exclusion ratio is now 49.20% because of the first 5 years of deferred growth. 
Payout / Exclusion Ratio - Life Only (Male)
Looking at the fifth chart, if a male age 60 were to annuitize $100,000 immediately, it would generate $618.14 monthly for as long as the man lives, with an exclusion rate of 55.70% . If the man were to defer the $100,000 for 5 years, it would grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $842.12 monthly for life, but the exclusion ratio is now 46.50% because of the first 5 years of deferred growth. 
Payout / Exclusion Ratio - Life & 10 (Male)
Looking at the sixth chart, if a male age 60 were to annuitize $100,000 immediately, based on his life expectancy and a guaranteed monthly payment for life and 10 years period certain, it would generate $604.85 monthly for as long as the man lives, or for 10 years at a minimum, with an exclusion rate of 55.30%. If the man was to defer the $100,000 for 5 years, it would grow to a value of $127,628. When you annuitize the new amount of $127,628 it will pay out $842.12 monthly for life, or for 10 years at a minimum, but the exclusion ratio is now 46.50% because of the first 5 years of deferred growth. Male Summary 
Female Summary 
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser. |
