Annuities are not life insurance. Annuities are the exact opposite. The principal function of a life insurance contract is to create an estate (sum of money) by the periodic payment of money into the contract. An annuity’s principal function is the liquidation of an estate. However, in contrast to life insurance, which is designed to protect against the risk of premature death, annuities are designed to protect against the risk of living too long.
The basic function of an annuity is to systematically liquidate a principal sum over a specified period of time. An annuity is usually purchased as a means to save for retirement. The benefit of purchasing an annuity is that the cash accumulated in the account grows tax deferred. Annuity benefit payments are a combination of principal and inter- est. Accordingly, they are taxed in a manner consistent with other types of income: the portion of the benefit payments that represents a return of principal (i.e., the contributions made by the annuitant) is not taxed; the portion representing interest earned on the declining principal is taxed. The result, over the benefit payment period, is a tax-free return of the annuitant’s investment and the taxing of the balance.
The basic function of an annuity is to systematically liquidate a principal sum over a specified period of time. An annuity is usually purchased as a means to save for retirement. The benefit of purchasing an annuity is that the cash accumulated in the account grows tax deferred. Annuity benefit payments are a combination of principal and inter- est. Accordingly, they are taxed in a manner consistent with other types of income: the portion of the benefit payments that represents a return of principal (i.e., the contributions made by the annuitant) is not taxed; the portion representing interest earned on the declining principal is taxed. The result, over the benefit payment period, is a tax-free return of the annuitant’s investment and the taxing of the balance.
An annuity contract provides for a series of periodic payments that begin on a specific date (such as when the annuitant reaches a stated age) or a contingent date (such as the death of another person), and continue for the duration of a person’s life or for a fixed period. Usually, but not always, an annuity guarantees a lifetime income for the recipient
Annuities consist of two periods - the accumulation period, and the annuity period.
The accumulation period is the “putting in” time and the growth time. For a single premium deferred annuity, it is the time between the purchase date and the date benefits begin. For a periodic premium deferred annuity, it includes all the time between the first and last premium payments as well as any additional time before benefits begin. The owner has the ability to make changes during the accumulation period. In all types of annuities, the principal earns interest. The first year’s interest is added to the original principal, and the combined sum then earns more interest in the second year. In other words, we earn interest on interest, or compound interest, in the second and every subsequent year.
The annuity period is the “taking out” time. This is the period following the accumulation of the annuitant’s payments (principal and interest) during which annuity benefits are received. During the annuitization period, the insurance company controls the funds in the annuity and disburses them according to the contract terms.
The accumulation period is the “putting in” time and the growth time. For a single premium deferred annuity, it is the time between the purchase date and the date benefits begin. For a periodic premium deferred annuity, it includes all the time between the first and last premium payments as well as any additional time before benefits begin. The owner has the ability to make changes during the accumulation period. In all types of annuities, the principal earns interest. The first year’s interest is added to the original principal, and the combined sum then earns more interest in the second year. In other words, we earn interest on interest, or compound interest, in the second and every subsequent year.
The annuity period is the “taking out” time. This is the period following the accumulation of the annuitant’s payments (principal and interest) during which annuity benefits are received. During the annuitization period, the insurance company controls the funds in the annuity and disburses them according to the contract terms.