What Is An Annuity And How It Works?
If you are looking forward to selling your annuities, then here are some points which may prove to be useful to you. These points are designed to guide you in understanding different terms like annuities, premiums, surrender charges and lump sums etc which are used in the financial market. A clear understanding of these financial terms can help you to get an idea about the various annuities available in the financial market. When you decide to sell annuities, you should be well aware of various aspects like payment value, maturity period, the guaranteed minimum payment, surrender charge and the annuitant options.
Annuity refers to any structured financial agreement wherein the holder of the plan is financially secure through receiving regular payments over a certain period of time. This can either be fixed rate payments or inflation-adjusted payments. The present value of such annuities is the amount today, which could be received by the annuitant, given a certain rate of return. In general, it is the expected revenue value at the time of termination of the agreement which determines the present value.
Premiums are paid monthly over a definite period of time to the insurer on a regular basis in exchange for a fixed premium. The annuitant receives periodic payments in the form of a lump sum, settlement value or an equal monthly amount. They are paid only if the policyholder dies within the defined period of payback. Withdrawal of cash flows means that the insurer must payout the whole face value of the plan, less the portion of the surrender charge allowed by law. Annuitants can also choose to redeem annuities before termination; but this will mean surrender charges and they may also reduce their surrender value.
Annuity rates are generally determined on the basis of the risk involved. In most cases, higher premiums are charged for longer term plans with higher returns. This risk-premium determination is also applicable to the guaranteed annuities. If you use a settlement as part of a life insurance or structured settlement plan, the structured settlement value is subject to the life expectancy of the payee or his dependents.
There are some plans that allow for early payoff. Early payoff allows you to pay tax-deferred until your annuity reaches the age of 70. This deferred tax amount is not taxable until distribution. However, note that you are not eligible to pay taxes on this amount in the future. You may however make additional investments using these funds and earn tax-deferred distributions instead. There are also insurance company annuities that allow for the early payment of premiums.
Another type of annuity contract that allows for early payoff is the ten-year exchange. With this type of annuities, the payments are made after a minimum of ten years from the date of contract award. In general, it is more costly than the life insurance contract because the payout is made after only one year. Compared to the life insurance contracts, however, this arrangement has lower rates. The ten-year annuitant also faces higher risks since the premiums can increase substantially over the years. If the annuitant lives beyond the age of 70, his death benefit will cease.