Premium Method
a. Single premium deferred annuity (SPDA) - A lump-sum immediate premium with a deferred payout period.
b. Flexible premium deferred annuity (FPDA) - Allows periodic, non- fixed contributions with a deferred payout period.
c. Single premium immediate annuity (SPIA) - Annuity begins immediately following premium paid.
d. Variable annuity - The return will vary depending on the performance of the underlying investments. The benefit could result from a single premium or flexible premium and may be an immediate or deferred annuity.

Uses
Annuities may appeal to anyone who wants a guarantee on their investment contributions without bearing the full investment risk of other investment options or growing funds on a tax-deferred basis. Unfortunately, the majority of annuity owners use them as a way to accumulate earnings then proceed to take a lump sum instead of taking advantage of the guaranteed-life-income feature.

  • Annuities can play a vital role in any situation where income is needed for only a few years or for a lifetime.
  • It is important to realize that annuities are not life insurance contracts. The principal function of a life insurance contract is to create an estate, an annuity's principal function is to liquidate an estate.

Practice Question:
Which are disadvantages of a straight life immediate fixed annuity?

I. Annuitant receives a fixed payment with no inflation hedge.
II. Annuitant cannot change the remaining value and ask for principal back.
III. Annuitant may die before the return of principal is realized, leaving nothing for the beneficiaries.
IV. Annuitant receives a guaranteed stream of income no matter how long he/she lives.

A. II & IV
B. I, II, & IV
C. VI only
D. I, II, & III
E. I, II, III, & IV

Answer: D
The annuitant receiving guaranteed income for life is an advantage. All others are disadvantages.
Taxation of Annuities

Related Articles
  1. Investing

    The Disadvantages of Annuity Contracts

    The disadvantages of annuities aren't always fully understood.
  2. Investing

    The Many Benefits of Deferred Annuities

    Having a deferred annuity can ensure income in retirement above and beyond Social Security.
  3. Retirement

    How a Fixed Annuity Works After Retirement

    These popular investments can provide a steady stream of income during your retirement years. Here are the details.
  4. Financial Advisor

    Advising FAs: Explaining Annuities to a Client

    Conceptually speaking, annuities can be thought of as a reverse form of life insurance.
  5. Financial Advisor

    Maximize the Tax Benefit from Your Annuity

    Understand how nonqualified annuities are taxed during your lifetime, and how they are taxed when passed on to your beneficiaries.
  6. Retirement

    Annuities: How To Find The Right One For You

    Fixed, variable and indexed annuities offer different features. Find out which one fits your needs.
  7. Investing

    What Do You Need to Know About Annuities?

    There are varying views on annuities. Use this basic information to draw your own conclusions.
  8. Retirement

    Managing Annuity Distributions in Retirement

    Strategies to help manage taxable deferred annuity distribution in retirement.
Frequently Asked Questions
  1. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
  2. How did moral hazard contribute to the 2008 financial crisis?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ...
  3. Which mutual funds made money in 2008?

    Read about the only mutual fund that turned a profit in 2008. Learn about risk-averse investment strategies and the financial ...
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center