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ANNUITY GLOSSARY
FIXED ANNUITIES- AN ANNUITY IS A FINANCIAL PRODUCT OFFERED
BY A LIFE INSURANCE COMPANY THAT
CAN BE USED
TO BOTH ACCUMULATE AND DISTRIBUTE
MONEY TO
AN ANNUITANT.
THE APPEAL OF THIS TYPE OF INVESTMENT
PRODUCT
IS THAT THE PRINCIPAL THAT IS
INVESTED IS
NOT SUBJECT TO THE UPS AND DOWNS
OF THE STOCK
MARKET. INSTEAD AN INTEREST RATE
IS CREDITED
TO THE CONTRACT AND IS LOCKED
IN FOR A PERIOD
OF TIME. THERE ARE ANNUITIES
THAT LOCK IN
INTEREST RATES FOR PERIODS RANGING
FROM 1,
3, 4, 5, 6, 7, & 10 YEARS.
ONCE THE LOCK
IN PERIOD IS OVER THE INTEREST
RATES CAN
BE ADJUSTED BASED UPON WHAT THE
MARKETPLACE
IS OFFERING (COMPETITIVE PRESSURE
ON THE
EXISTING CARRIER TO KEEP THE
MONEY IN HOUSE),
BUT CAN NEVER FALL BELOW A CONTRACTUAL
MINIMUM.
ANOTHER MAJOR FEATURE THAT AN
ANNUITY OFFERS
IS TAX DEFERRAL. THAT IS TO SAY
THAT THE
ANNUITY GROWS ON A TAX DEFERRED
BASIS, UNTIL
MONEY IS DISTRIBUTED TO AN ANNUITANT.
ADDITIONALLY, UPON DISTRIBUTION
TO AN ANNUITANT,
A PORTION OF THE DISTRIBUTION
IS DEEMED TO
BE A RETURN OF BASIS AND IS NOT
TAXABLE.
THIS IS CALLED THE EXCLUSION
RATIO. THE BALANCE
OF THE DISTRIBUTION IS TAXABLE
AT ORDINARY
INCOME TAX RATES.
THE FLEXIBILITY IN DISTRIBUTION
OF THE ANNUITY,
CALLED ANNUITIZATION, IS YET
ANOTHER REASON
WHY IT IS SUCH A POPULAR INVESTMENT
VEHICLE.
ONE CAN ARRANGE TO HAVE DISTRIBUTIONS
FOR
LIFE (SINGLE LIFE ANNUITY); FOR
LIFE BUT
GUARANTEEING A PERIOD OF TIME,
FOR EXAMPLE
LIFE AND 10 YEARS OR LIFE AND
20 YEARS (LIFE
WITH PERIOD CERTAIN); FOR LIFE
WITH A PERCENTAGE-100%,
75%, 50%- TO A NAMED SURVIVOR
(JOINT AND
SURVIVOR); AN INTEREST ONLY DISTRIBUTION;
A REFUND ANNUITY THAT GUARANTEES
THAT IF
THE ANNUITANT DIES BEFORE PAYMENTS
EQUAL
THE AMOUNT DEPOSITED, THE BALANCE
IS PAID
TO THE BENEFICIARY; AND A DISTRIBUTION
FOR
A SPECIFIC PERIOD OF TIME (ANNUITY
OR PERIOD
CERTAIN).
THERE ARE A WIDE VARIETY OF FIXED
ANNUITIES
AVAILABLE THAT ARE CAPABLE OF
MEETING THE
NEEDS OF THE POLICYHOLDER. THEY
CAN BE BROKEN
DOWN INTO SEVERAL CATEGORIES
AS FOLLOWS:
IMMEDIATE ANNUITIES- THIS TYPE OF ANNUITY REQUIRES A LUMP SUM
DEPOSIT AND STARTS TO MAKE DISTRIBUTIONS
ON A MODAL BASIS RANGING FROM
A MONTH TO
ONE YEAR FROM DATE OF PURCHASE.
THEREFORE
THE MAIN PURPOSE OF THIS TYPE
OF ANNUITY
IS GUARANTEEING AN INCOME STREAM.
DEFERRED ANNUITIES- THIS TYPE OF ANNUITY CAN BE PURCHASED BY
EITHER A LUMP SUM OR BY FLEXIBLE CONTRIBUTIONS.
UNLIKE THE IMMEDIATE ANNUITY, THE USUAL REASON
ONE PURCHASES THIS TYPE OF ANNUITY IS FOR
TAX DEFERRED ACCUMULATION, WITH DISTRIBUTION
TO HAPPEN AT SOME LATER TIME.
MOST ANNUITIES TODAY ARE "NO-LOAD",
MEANING THAT 100% OF THE INVESTMENT
WILL
BE CREDITED WITH INTEREST. CONVERSELY,
THERE
ARE USUALLY SLIDING SURRENDER
FEE PENALTIES
FOR EARLY WITHDRAWAL, USUALLY
OVER A 5-10
YEAR PERIOD.
BE AWARE THAT ANNUITIES HAVE
TAX DEFERRAL
ADVANTAGES BUT ALSO HAVE PENALTY
TAXES IF
THE ANNUITY IS SURRENDERED OR
IF DISTRIBUTIONS
ARE MADE PRIOR TO AGE 59 ½.
ANNUITIES CAN BE USED AS AFTER
TAX PERSONAL
INVESTMENTS, AS IRA'S, OR AS
INVESTMENT VEHICLES
IN A QUALIFIED PLAN.
TO ORDER PROPOSAL
GLOSSARY INDEX
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