What is a Life Annuity?

A life annuity is a financial contract in the form of an insurance product according to which a seller — typically a financial institution such as a life insurance company — makes a series of future payments to a buyer in exchange for the immediate payment of a lump sum or a series of regular payments, prior to the onset of the annuity.

How many types of Annuities are there? Broadly there are two classes of annuities; immediate annuities and deferred annuities and these two classes have various sub classes including fixed deferred, variable, and equity-indexed annuities.

What is an immediate annuity? The annuity in which the benefit payments begin very quickly, normally within one year of the time it is purchased is termed as an immediate annuity. An immediate annuity is commonly purchased with a single premium.

What is a deferred annuity? The annuity in which a policy holder pays a premium to the annuity providing insurance company that issues a contract promising to pay interest or gains made on the deposit while deferring the income and the taxes until you actually withdraw the money or begin receiving an income. Three major types of deferred annuities are Fixed Deferred annuities, Equity-Indexed annuities, and Variable Annuities.

What is the death benefit on a fixed deferred annuity? The death benefit on most fixed deferred annuities is equal to the full contract value, i.e. premium plus accrued interest compounded annually and credited daily minus any prior withdrawals, calculated as of the date of death.

What is the death benefit on an equity-indexed annuity? The death benefit on most equity-indexed annuities is equal to the full contract value, i.e. premium plus accrued gains compounded annually minus any prior withdrawals, calculated as of the date of death, or in some cases, as of the last contract anniversary.

What are “qualified” and “nonqualified” annuities? Qualified annuities are sold as part of a tax-qualified plan such as an IRA, Keogh, SEP, or company pension plan, and Nonqualified annuities are not used to fund a tax qualified plan such as an IRA, Keogh, SEP, SEP IRA, or TSA.

What makes annuities different from other investments? Their tax deferred status, the avoidance of probate, and the promise of guaranteed income for life make annuities different from other types of investments.