Chapter 14. Annuities The Annuity Principle............................................................................................................... 14–1 Annuity Classifications . ........................................................................................................... 14–2 Annuity Pros and Cons ............................................................................................................. 14–3 Life Expectancy Table. ............................................................................................................. 14–4
14–1. THE ANNUITY PRINCIPAL. An annuity is a long- term financial product designed for retirement. While many types of financial companies can sell annuities, only an insurance company can issue an annuity because annuities are insurance products. It is a contract between you and an insurance company where the insurance company agrees to pay you a regular monthly income over your life or for a specified number of years. When you purchase an annuity, you agree to pay the insurance company a certain amount of money in exchange for this income. Annuities are a means by which you can manage risk; not the risk of death during income earning years, rather the risk of living too long and running out of money. You can outlive the proceeds of your 401(k), IRA, and other investments — but most annuities are designed to provide you with an income for life. Current life expectancy information is provided at the end of this chapter.
The earnings during the accumulation phase of an annuity are not taxed until distribution — which is usually at retirement. Overtime, the tax payment deferral provides a real financial advantage. 14–2. ANNUITY CLASSIFICATIONS . There are two distinct phases to an annuity contract — the Accumulation Phase (Pay-In) and the Annuitization Phase (Pay-Out). These phases will differ based upon whether you have a Fixed Annuity, a Variable Annuity, or an Indexed Annuity. a. Fixed Annuity. Under this approach, the insurance company guarantees the amount of the monthly payment. To fund this type of an annuity, the company will generally invest your payments in very low risk securities that emphasize protection of capital. This is necessary because the company has guaranteed a
CHAPTER 14: ANNUITIES
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