An annuity has often been described as life insurance in reverse. Instead of the life company giving you a lump sum, you give one to the company, which in return agrees to pay you an income over an specified period of time.
Two Types of Annuities
There are two annuity types:
- Immediate Annuities – An annuity that begins making periodical payments the moment it is purchased. Therefore, an annuitant immediately receives an income.
- Deferred Annuities – These are annuities that an annuitant defers to be paid income until later, usually before a certain age, for example, at the age of sixty-five, after which the annuitant begins to receive periodical payments. They are often lumped together with approved deposit funds (ADFs) under the heading of rollovers.
Depending upon the agreement between the life insurance company and the annuitant, most annuities allow the latter to choose the mode of settlement arrangement. In general, it is most likely that the annuitant will go the traditional way, that is, life annuity. What are the forms or modes of annuity payments?
Two Forms of Annuity Payments
There are two forms of annuity payment:
- Life Annuity – Payment to annuitant continues until death. On early death, payments revert to beneficiaries for the balance of period. However, if annuitant survives the period, payments stop.
- Term Annuity – Annuity in which payments are made for an agreed period of time.
Exploring Annuity and Annuitization
For one who has just retired, or are about to retire, the main concern will be how to protect hard-earned cash and still get the regular income needed for everyday sustenance.
An annuity, which is a form of private pension, can eliminate the anxiety. It can also provide attractive returns equal to or better than a mixed portfolio, and it has tax advantages. It is always best to consult the nearest taxation office for the right tax-related information.
An annuity is a type of investment by which an eligible termination payment (ETP) enables a potential annuitant to continue to defer tax after a certain age, say, the age of sixty-five. Once invested, no tax is paid on annual earnings, whereas other rollover funds pay up to 15% tax on earnings. Also, on withdrawal, part of the monthly payments may be tax free, and there is a tax rebate.
Under some existing tax office guidelines, annuities can offer either a fixed income stream or a smaller, fixed payment that can be topped up with annual bonuses. Annuitants can opt for life annuity or fixed term. Fixed terms cannot be longer than the life expectancy of the annuitant, or of the surviving member, if annuitants are a couple.
However, life annuities usually cannot be commuted, but an annuitant can commute an indexed, fixed-term annuity and receive the present value of the payments yet to be received.
Insurance is all about protecting self, family and material possessions. Everyone hopes for the best, but sometimes things can go wrong unexpectedly. Nowadays, life insurance brokers are available to provide advice on price and rate quote, so are insurance online providers. What is most important is knowing one’s needs and doing something about them, and understanding about insurance as a protection necessary to be able to enjoy a financially secure life.
Interested readers may want to check the following articles: Investing Money: Risk Versus Return on Investment, Business Insurance Quotes and Sayings and Glossary of Life Insurance Terms, Definitions, and Resources.
Source:
Fenton, Jones, Mark. A beginner’s Guide to Life Insurance. Victoria: Wrightbooks, Pty.
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