Understanding Immediate & Deferred Annuities
An annuity is a product which can provide you with an income for as long as you live. There are two types of annuities:
The first is when you pay a lump sum to a life insurance company, and they pay it out to you right away in periodic installments. This type is known as an immediate annuity – the payments to you start immediately.
The second, and more common, is where money paid by you is accumulated at interest over a period of time. If you choose, the accumulated amounts will then be paid out to you in periodic installments, usually when you retire, in order to supplement your retirement income. This type is known as a deferred annuity – the payments to you are deferred for a number of years.
Currently, a deferred annuity may have tax advantages, in that the interest credited to your funds is deferred from current taxation. That is to say, income tax is not owed until you start receiving distributions from the annuity.
Both types of annuities offer you certain options for receiving your income. It is usually paid to you monthly.
The company will pay you an income for as long as you live. Period Certain Annuity – The company will pay you an income for a specified amount of time (5 years, 10 years, 20 years, etc.).
Life Annuity with Period Certain
The company will pay you an income for as long as you live, but if you die before the period certain that you choose, the income will be paid to a survivor you designate until the end of that period.
Joint and Survivor Annuity
The company will pay an income to you during your life, and after your death will pay a percentage of that income (50% or 75%, for example) to a survivor you designate during, his or her life.