Taxqualified Annuities vs. Annuity Payments

What is the difference between a term and permanent annuity? A term annuity allows you to choose to receive payments periodically instead of all at once. Permanent annuities are set up so that the person receiving the funds receives the payments over a certain period of time, usually from one to ten years. Which one is right for you? It depends on your specific financial needs and what you’re expecting from your annuity. Here are some things to think about:

Pays out according to its stated rate of return. In a completely aligned annuity, the initial payment is guaranteed at a fixed rate of interest and the value of the payments will not change over time. The present value of such an annuity is simply the present value of future payments at a certain rate, given a certain interest rate or discount rate. The higher the discount rates, the lesser of the present value of your annuity. In this case, the best option may be an ordinary annuity if you expect your payments to gradually increase over time.

Pays out according to a mathematical formula. In general, annuities are priced in a certain way so that the expected values of future payments that you’ll earn with the annuity are comparable to the present values of all future payments you’ll be able to earn with other investments. For example, if you use a ten-year moving average to calculate your annuity’s present value, you’ll find that most people will get a larger check at the end of their life than they did at the beginning. Because annuities are priced using certain formulas, it’s important to consult with a financial advisor or financial planner before deciding which type is right for you.

Calculates using a lump-sum payment. An annuity pays out a fixed amount over a fixed period of time. Over time, the value of your annuity usually increases because your investment grows. However, some annuities contain clauses that can reduce their actual present value. For example, some allow you to make payments that are equal to the present value instead of paying tax-deferred amounts. If you don’t plan to withdraw any money early from your plan, then you don’t need to pay regular payments into it.

Aligns your payments with a specific percentage of your indexed dollar amount. If you own a highly appreciated annuity but your cost of living is lower than the initial purchase price, your payments will be adjusted to give you a guaranteed minimum payment. The annuity’s guaranteed minimum payment is called the aligned minimum annuity payment. The aligned payment’s base is based on the lowest percent of the initial stock price for the same period of time over the years that the annuity exists.

Reduces your taxable interest. An account with a one-time settlement and initial purchase price is considered “reduced” or “taxable” interest. It’s only taxable if your account grows over the years. Also, the longer your payments are made during the accumulation period, the less your account value will be over time. The tax deferred value is equal to the total amount of your account’s average compounded interest.