subject: From The Time Of The Roman Empire, To Today [print this page] Annuities are a very old concept of exchanging a lump sum for a predetermined income stream set in the future. The theory that a single dollar is worth much more today than it will be in the future is known as the Time Value of Money.
Annuities have a set period, and the cash flow they will provide is calculated on that period of time. In other words, an Annuity is an Income Investment. Every individual State, in the USA, regulates the Annuity market independently from the others; however the taxation is governed by the Federal Government and the Internal Revenue Code.
Annuities are a great way to predict that one won't outlive his own assets.
Different types of Annuities
Fixed Annuities are purchased through an insurance company to finance - with its benefits based on the capital invested - a long term goal. The security a fixed annuity offers is an income for life, plus with the added death benefits it carries, your loved ones will be protected. Early withdrawals will be taxed according to the CPI (Consumer Price Index).
The interest rate is fixed at the time of purchase. Once the annuity is withdrawn the deferred taxes have to be paid.
Basically the Fixed Annuity investment guarantees the annuitant with a fixed payment schedule and a guaranteed principal
Variable Annuities are of two kinds, Qualified and non-qualified. The difference is established at the time of purchase. If an annuity is bought with after-tax dollars, it is non-qualified (bought with cash or unsheltered securities); if bought with pre-tax dollars, is qualified (for example income received from the IRA).
Variable annuities accumulate money in several accounts. In general they guarantee a minimum rate of return. Variable Annuities offer a guaranteed principal, interest and renewal rates.
Variable Annuities will pay more if the investment portfolio does well than if it has poorly returns, in which case the payments will be smaller.
Indexed Annuities are bought either with a lump sum or with a series of payments (accumulation period). The results are the same; your return will be based on the Stock Market Index (S&P 500 or Dow Jones Industrial Average). The interest earned is tax deferred, meaning it has to be paid once withdrawn. Indexed Annuities also carry a death benefit and in case of death of the annuitant, a lump sum will be paid to the estate or the named beneficiary.
Understanding Tax-deferment
During the accumulation phase of an annuity, for individual annuitants, the interests are not subject to federal taxation.
The great benefit of tax deferment is the taxation free period during the growth of the investment and the tax rate variation of this same individual at the time of the accumulation period, while the income is higher than it would be at retirement age.
Gains will be taxed as income instead of as capital gains, as all insurance products; annuities are a great investment for the golden years.
