All annuities follow the same principle – make an investment, then receive payments later. But not annuities work in the same way. Immediate annuities and deferred annuities are fundamentally different. Payment schedule, and whether you choose fixed, variable, or indexed will also affect how an annuity works.
How Do Immediate Annuities Work?
Immediate annuities involve a single lump-sum payment in exchange for steady payouts. This is why they’re also referred to as Single Premium Immediate Annuities (SPIAs). You can receive lifetime payments, or you may choose to have payments for a term lasting 10-15 years.
How Do Deferred Annuities Work?
Deferred annuities have two phases – accumulation and payout. During the accumulation phase, your savings build tax-free in an account. You can make unlimited contributions during this time. The payments begin during the payout phase. You can access your funds during the accumulation phase, but you face a tax penalty if you do so.
How Does The Payment Schedule Work?
This is entirely up to you. When you first get your annuity, you choose how often you want to receive your payments.
You can get your payments:
- Monthly
- Quarterly
- Annually
- Semiannually
If you get a deferred annuity, you can choose to get the entirety of your funds as a single lump sum.
If you pass away, your spouse can receive your payments as part of a joint and survivor annuity.
How Are Payment Amounts Decided?
This is a combination of how the insurer calculates your payment amounts based on insurer calculations, your payment schedule, and whether you choose fixed, variable, or indexed annuities.
Your insurer takes your age, the standard interest rates, and duration of payments into consideration when deciding payment amounts.
With payment schedules, your payments will be smaller the more frequently your funds are disbursed. For example, you will receive substantially more if your payments are annual instead of monthly.
If you choose a fixed payment, you will get payments with a guaranteed amount each time they’re disbursed. But if you choose a variable annuity, the performance of subaccounts (e.g. mutual funds) can lead to more fluctuation. Fluctuation in payments is amplified with indexed annuities, as you will be paid in accordance with a stock market index’s growth, such as the S&P 500 or Nasdaq 100.
How Are Payments Taxed?
This depends on whether you contribute with pre-tax or after-tax income.
If you invest with pre-tax income, you have a qualified annuity. Your funds are taxable when they’re disbursed.
If you choose to invest with after-tax income, you have a non-qualified annuity. Here, your contributions aren’t taxed. Only the interest and capital gains are taxed.
Get The Annuity That Works For You
At Jersey Medicare Solutions, we believe in more than just helping you make money. We believe in making your money work for you. By choosing an annuity, you will have income growth that will protect your financial future, allowing you to focus on enjoying life after you’ve retired. Call us today at 973-500-3708.
Thomas M. Brzezinski is one of the founding partners of WMAG William & Michael Advisor Group LLC and Jersey Insurance Solutions. He has been involved in the insurance industry for over ten years and specializes in developing client relationships that last a lifetime.
