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An Annuity is a
unique financial product that provides tax deferral of interest and
capital gains and the option of a guaranteed monthly income which you can
not outlive.
Accumulation Period
During the accumulation period of an annuity all
premium payments are invested in either a fixed account also known as a
guaranteed account. Your principal and the interest rate are guaranteed by
the company. Interest rates a usually guaranteed for one year however
increasingly guaranteed annuity rate are available for longer durations.
Distribution Period
During retirement funds can be withdrawn from the contract and
the owner has several options to chose from.
Withdrawals may be made at any time from the contract,
prior to retirement as well, usually with a minimum dollar amount and at
the option of the owner.
Systematic Withdrawal Plan enables the owner to
pre-authorized periodic withdrawals. The owners of the contract instructs
the company to withdraw a percentage or a level dollar amount from the
contract on a monthly, quarterly, semiannual, or annual basis. Checks are
sent directly to the owner or can be deposited directly into the owners
checking account.
Fixed Account
The owner of the contract may transfer all or part of the value of the
contract to the fixed account, sometimes called the guaranteed account,
and elect to annuitize those funds. In essence the owner of the contract
for a fixed dollar amount, purchases a monthly income which will be paid
to him/her until death.
For instance a 68 year old male could receive a monthly income which would
be payable to himself as long as he is alive, or to his beneficiary
should he die within the first 10 years. This option is known as "Life
Annuity with Payments for a Guaranteed Period", in this case the
guaranteed period is ten years.
Contracts when issued include a "payout table" stating the minimum payout
guaranteed by the company based on age and sex (according to state law).
When the contract is annuitized the payout will be based on the higher
value of the guaranteed amount stated in the table or the current
values used at that time.
In this example according to the payout table, for every $1,000 which is
annuitized under the "Life Annuity with Payments Guaranteed for 10 Years
Option" the monthly payout would be $5.68. This is what was guaranteed at
the time the contract was issue however the current payout rate which
the company is using is $7.93. All payout rates are expressed as dollars
per period (monthly, quarterly, semiannually, annually) per $1,000 dollars.
Therefore if this individual elected to annuitize $30,000 under this
option his monthly payout would be $237.90 per month. This dollar amount
is guaranteed to be paid to him as long as he is alive. Should death
occur in the first ten years his beneficiary would receive the
difference between 10 year of monthly income and the amount he actually
received.
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