Posted June 29, 2013 | Filed under topic Types of Life Insurance Coverage
Many people purchase life annuities because they promise an income stream as the person gets older, but there are many things to consider when choosing an annuity.
Annuities are made of two parts – the accumulation and the distribution. There are also two types of annuities – immediate and deferred.
Immediate Life Annuities
Immediate life annuities require the buyer to accumulate the coverage amount in one lump sum. This is more typical when people want to roll-over retirement savings, for example.
With immediate accounts, distribution generally starts within a year and the person covered receives regular payments until death. Money in the account that has not been distributed by the time of death is forfeited to the insurance company. When the money runs out, distribution stops.
Deferred Life Annuities
Deferred life annuities require regular payments by the purchaser be made into the account for a certain amount of time before any distribution can take place.
Deferred life annuities come in several forms – fixed and variable annuities, guaranteed annuities, joint annuities, and impaired life annuities.
- Fixed Life Annuities are just that – payments are fixed or increase by a fixed percentage. Those fixed rates do not allow for inflation unless you purchase a cost of living adjustment rider.
- Variable Life Annuities defer taxes on the money until the withdrawal is made. The variable part is determined by investments made with the money and how those investments perform. Money in the account that has not been distributed by the time of death is forfeited to the insurance company. Consequently, the health of the insurance company is vital to the health of your money.
- Guaranteed Life Annuities eliminate the risk of the proceeds not going to the insured or heirs. While annuity payouts will be smaller, payments continue until death even if the insured lives long enough to receive more money than was invested. And, if the insured dies before getting their investment back, his/her estate or beneficiary can collect the remaining payments.
- Joint Life Annuities can be joint-life format or joint-survivor format. Payments stop upon the death of one or both people covered, depending on which is purchased.
- Impaired Life Annuities require underwriting and improve terms for those who have a diagnosis that is severe enough to expect a reduction in life expectancy.
While regular payout payments seem like a good idea, there is nothing to say those payments will be enough for you to meet your needs. Further, the money accumulated in the account is not available in case of emergencies. That is why it makes sense to put no more into the annuity than you can afford to do without.