Insurance Education – How Are Annuities Paid?

Single Premium immediate annuity premiums are paid when the contract is signed, hence the term “lump sum payments.” The funds for the payment of premiums can come from a variety of sources such as Employee profit-sharing plan, Savings Accounts, Cash Value of life insurance policy or sale of home or property, etc.

In today’s market, many annuities are purchased as the result of an IRA, 401(k) or 403(b) rollover. When this is done, it is extremely important that it be a “Section 1035” exchange, i.e. that it not be a taxable exchange unless, for some reason, the customer wants to pay taxes on the amount of the rollover at that time. The insurance company will furnish the papers that must be executed for such a rollover to exist and as discussed elsewhere in this text, the funds must be automatically transferred to the new annuity.

Periodic Level Premiums is a typical payment method of deferred annuities. The annuitant pays equal premium amounts at regular intervals, until the benefits are scheduled to begin. Some individuals choose this option as it is similar to making deposits into a regular savings type account.

Periodic Flexible Premiums is a premium payment method that is more “in tune” with today’s investment world. The annuitant pays the premiums over a period of time, until they are paid off. Since the premiums are flexible, they appeal to those who want flexibility in the timing and amount of premium payments and are particularly attractive to those who want a program in which they can vary the amounts they save each year. This also appeals to those who earn commissions, or other types of irregular income such as actors, fruit-truck drivers, artists, etc., not to mention families with growing children. As long as the annuity remains in effect, funds will continue to accrue interest. The principal disadvantage is that the actual amount of annuity benefit cannot be determined in advance, which may be essential in financial planning.

Insurance companies that issue annuities are restricted as to the amount of premiums paid in advance that they are allowed to collect. This is important inasmuch as Variable Annuities, and to some extent, Equity Indexed Annuities, allow other than fixed payments. Obviously, in order for the insurance system to work, an insurer may accept such funds, but the funds may not exceed the sum of future unpaid premiums on any policy or the sum of 10 such future unpaid annual premiums if such sum is les than the sum of future unpaid premiums. These regulations do not disallow the rights of an insurer to accept funds when there is an agreement that such accumulation of funds will be used for purchasing annuities at a future date.

An Annuity Certain specifies the number of benefits payments of a set amount. This option will guarantee a minimum amount that the insurance company will pay on an annuity. The annuity has a Death Benefit that provides for payment to be made to the designated beneficiary upon the annuitant’s death and will continue as long as the beneficiary lives. In effect, this annuity says that it will pay the benefits remaining of the period certain to the beneficiary. However, if the annuitant should survive the period certain, then the annuity performs as a Life Annuity.
Cecil dies 3 years after taking out an Annuity with a 5-year period certain. The Annuity Company will continue to make payments to his beneficiary for next two years. Insurance companies usually pay the present value of the remaining payments in a lump sum, so Cecil’s beneficiary will receive 2 annual payments.
If Cecil had survived the first five years of annuitization (liquidation period), the annuity would have continued to be paid out in the normal manner, ceasing upon the annuitant’s death.

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