Chapter 3-5 Immediate Annuities

Immediate annuities offer numerous benefits to the purchaser, such as security.  The annuity offers fixed lifetime income which can never be outlived.  A second benefit of immediate annuities is simplicity.  The annuitant does not have to oversee his investments, follow the markets, or record interest or dividends.  Another benefit is high returns, the interest rates utilized by insurance companies to measure immediate annuity income are typically more than CD or Treasury rates, and because a portion of the money is given back with every payment bigger totals are acquired than if they were offered solely on interest.  Preferred tax handling is still another benefit.  Immediate annuities allow you to defer paying taxes on some of the profits that you have accumulated in a tax deferred annuity when rolled into an immediate annuity.  Only the part applied to interest is taxable income, the majority of the payments are nontaxable return of money.  A fifth benefit is safety.  Money is guaranteed by assets of the insurer and not liable to the changes of the financial markets.  And a sixth benefit of immediate annuities is that there are no sales or administrative charges.

The monthly payments from a single life annuity are always more than those that come from other types of immediate annuity, such as the life with period certain annuity, or the joint and survivor annuity.  The insurer of a single life annuity measures its liability only until the last routine payment prior to the annuitant’s death.  Since the payments on a single life annuity come to an end when you die, choosing this type of annuity is, to a certain extent, a gamble that you anticipate living longer than the average person.

When you lengthen the span of a life annuity by resuming payments to a second person through a joint and survivor annuity, or for a guaranteed minimum extent of time through a period certain annuity, the additional coverage may lower the monthly payments by 5 to 15 percent.  Some circumstances where these lengthened types of immediate annuities would be appropriate are when the income is required to be guaranteed over the life spans of a husband and wife, through a joint and survivor annuity; when payments have to keep going for a particularized period, through a certain and continuous annuity; and when the annuitant wants to ensure that if he dies prior to his entire investment being distributed the remainder of the deposit keeps going to an assigned beneficiary, through an installment refund annuity.

One kind of immediate annuity is a period certain annuity.  The contracts are often 5, 10, 15, and 20-year period certain annuities.  Equal payments are received for the length of the annuity.  For example, in a 15-year period certain annuity, you receive equal payments for 15 years.  If the annuitant dies prior to the certain period coming to an end, payments will be paid to the assigned beneficiary.  There are no payments made to the annuitant following the end of the period.  With a period certain annuity, you may outlive the annuity.

As with period certain annuities, there are various types of single life annuities.  One type of single life annuity is a single life only without refund, in which equal payments are received for the annuitant’s life span and stop when the annuitant dies.  A second type is a single life with 5-years certain, also known as 5-years certain & continuous.  Equal payments are received for the life span of the annuitant, but if the annuitant dies prior to the end of the 5 years, payments will be paid to the assigned beneficiary until the 5 year period is over.  Period certain and continuous annuities are also offered in 10, 15, 20, and 25 year period denominations.  Single life with installment refund is another type of single life annuity.  Equal payments are received for the life span of the annuitant.  But if the annuitant dies prior to receiving an amount equivalent to the beginning premium, the regular payments will continue to be paid to the assigned beneficiary until all the payments received by both the annuitant and the beneficiary are equivalent to the beginning premium, minus interest.  Another type of single life annuity is a single life with cash refund.  Equal payments are received for the life span of the annuitant, but if the annuitant dies prior to receiving an amount equivalent to the beginning premium the disparity between the premium and all the payments received will be paid in one individual payment to the assigned beneficiary.

Joint & survivor annuities are another type of immediate annuity.  There are various types of joint & survivor annuities.  One kind of joint & survivor annuity is a joint & survivor (50%…75%) reducing on first or either death.  Full equal payments are received provided that both the annuitant and joint annuitant are living.  When either the annuitant or joint annuitant dies, equal payments will continue but are lowered 50 to 75 percent to the survivor until they die.  A second type is a joint & survivor (50%…75%) reducing only on death of primary annuitant in which full equal payments are received provided that both the annuitant and contingent annuitant are living.  In this type of annuity the payments to the primary annuitant are not lowered at all, the payments to the contingent annuitant are lowered if the primary annuitant dies before the contingent annuitant.  It is sometimes referred to as a joint and contingent annuity.

You can also add a period certain clause to a joint & survivor (50%…75%) annuity, which would signify that even if either the annuitant or joint annuitant dies prior to the end of the certain period, payments to the survivor will not be lowered until after the end of the certain period.  If both the annuitant and joint annuitant die prior to the end of the certain period, full equal payments will be paid to the assigned beneficiary until the certain period comes to an end.  Adding an installment refund clause to a joint & survivor (50%…75%) annuity would mean that full equal payments will be received provided that both the annuitant and contingent annuitant are alive.  If both the primary annuitant and joint annuitant die prior to receiving regular payments that total the beginning premium, then the regular payments will keep being paid to the assigned beneficiary or estate until all the payments received, typically minus interest.  You can also add a cash refund clause to a joint & survivor (50%…75%) annuity.  The sole contrast between this alternative and the installment refund clause is that if both the primary annuitant and joint annuitant die prior to receiving in regular payments a total that is equivalent to the beginning premium, then the disparity between the beginning premium and the regular payments received during the life spans of the annuitants is paid to the estate or assigned beneficiary in one individual payment.  You can also add a period certain clause to a joint & contingent (50%…75) annuity.  If the annuitant dies prior to the end of the certain period, payments to the contingent annuitant will not be lowered until after the certain period comes to an end.  If both annuitants die prior to the certain period coming to an end, full equal payments will be made to the assigned beneficiary until the certain period comes to an end.

Another type of joint & survivor annuity is a joint & full survivor (100%) annuity, in which equal payments are made provided that either the annuitant or joint annuitant is alive.  You may also add clauses to joint & survivor (100%) annuities.  By adding a period certain clause, if both the primary annuitant and joint annuitant die prior to the end of the particularized certain period, full equal payments will be made to the assigned beneficiary until the certain period comes to an end.  In a joint & survivor (100%) annuity with an installment refund clause, equal payments are received for the life spans of the annuitants.  If both the primary annuitant and joint annuitant die prior to receiving in regular payments a total that is equivalent to the beginning premium, the regular payments will continue to the estate or assigned beneficiary until all the payments made is equivalent to the beginning premium, typically minus interest.  You may also add a cash refund clause to a joint & survivor (100%) annuity.  In a joint & survivor (100%) with cash refund clause equal payments are received for the life spans of the annuitants.  If both the primary annuitant and joint annuitant die prior to receiving in regular payments a total that is equivalent to the beginning premium, then the disparity between the beginning premium, typically minus interest, and the regular payments received during the life spans of the annuitants, is paid to the estate or assigned beneficiary in one individual payment.

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