The Retirement Annuity

The retirement annuity is a contract between you and a life insurance company.  Even if you purchase an annuity from a broker or banker, the contract itself must be issued by an insurance firm.

There are two types of annuities: deferred and immediate.

The deferred annuity typically permits a single premium deposit as well as multiple premium deposits.  There are exceptions.

Premium payments are allocated amongst an array of investment choices. The fixed product provides interest rate guarantees, while the variable product offers dozens of separate accounts similar in nature to mutual funds.

Most fixed annuities guarantee a minimum rate of interest and credit whatever current rate is available.

The performance of variable annuities depends on the actual rate of return of the individual separate accounts.

The variable retirement annuity is a high risk investment in that it exposes the buyer to an abundance of risk related choices.  The Securities and Exchange Commission is constantly on the lookout for unscrupulous sales tactics.

Deferred contracts permit you to convert the principal value into income based on age and time parameters. The amount of income depends on which option you select.

For instance, you can select to have income paid to you for as long as you live. And, when you die, the income can either stop completely or continue to another person for a specific period of time.

The amount of the income is highest when you select to have it stop upon your death. Sometimes it makes sense to select the highest amount and guarantee continued income for a beneficiary by purchasing a life insurance policy.

The immediate annuity does not permit accumulation. It generates income right away or no later than 12 months from issue date. Once again, the actual amount of income depends on age and time factors.

The retirement annuity is not restricted as a retirement planning product. However, income received from an annuity prior to age 59 1/2 is subject to a 10 percent penalty tax. Consequently, most annuities are ultimately used as a retirement supplement.

As a note of interest... a cash value life insurance policy has annuity options written into the contract.  A table of income options is provided, which can be used to convert the cash value into guaranteed income for the insured, or it can provide a pre-selected method by which the death benefit is paid to the beneficiary.