General Purposes of Tax Deferred Annuities The term "annuity" derives from a Latin term meaning "annual", and generally refers to any circumstance where principal and interest are liquidated through a series of periodic payments made over time. A. "tax-deferred" annuity is an annuity in which taxation of interest or other growth is deferred until it is actually paid. Life insurance is used to create an estate for an individual if he or she dies too soon. A tax-deferred annuity, however, can provide protection against the possibility that an individual will live too long, and outlive his or her accumulated assets. In addition to providing lifetime income, tax-deferred annuities are also used as a means of accumulating funds for a specific purpose, such as a childs education. In court cases involving wrongful death or personal injury, "structured settlements" make use of life insurance company annuities to provide regular income to survivors or injured individuals.
Types of Annuities
- Fixed Annuities - the issuing life insurance company will guarantee a certain rate of interest, for a specified period of time. This type of annuity can be purchased with a single lump sum of cash, with installment payments over time, or with flexible payments.
- Equity-Indexed Annuities - combine a guaranteed minimum interest rate, with a potential for greater growth linked to a specific equities market index such as the Standard & Poors 500 index. If the chosen index rises sufficiently during a specific period, a greater interest rate is credited to the contract owners account for that period. This type of annuity can also be purchased with a single lump sum of cash, with installment payments over time, or with flexible payments.
- Immediate Annuities- are normally purchased with a single premium payment. Annuity payments to the contract owner usually begin one period (monthly, annual, ect.) after the contract is issued. Popular payment periods include:
- Life Only: Regular payments are made for as long as the annuitant lives. When the annuitant's life ends, payments cease and no refund is made, even if the contract owner has not yet recovered the initial principal.
- Life with Term Certain: Regular payments are made for the life of the annuitant, or a specified number of years. If the annuitant dies before the specified term has passed, annuity payments continue to a beneficiary for the remainder of the term.
- Joint and Survivor: Regular payments are made over the lives of two individuals. When one dies, annuity payments (or a specified portion) continue to the survivor.
- Specified Period: Regular payments are made for a pre- selected number of years. If the annuitant dies before the specified period has expired, payments are continued to a named beneficiary for the remaining term.