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. Retirement

    Explaining Types of Fixed Annuities

    Learn about this popular retirement tool, its pros and cons and how annuities work to create a guaranteed regular stream of retirement income.
  2. Retirement

    Are Annuities Retirement-Only Investments?

    Learn more about why annuities are generally purchased and the way that they can positively and negatively affect an individual preparing for retirement.
  3. Retirement

    How to Use Annuities for Retirement Income

    We explain how to use annuities for guaranteed income in retirement.
  4. Financial Advisor

    Annuities: The Good, Bad and the Ugly

    Annuities suffer from a few perception problems. This primer that covers the good, the bad and the ugly of annuities.
  5. 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.
  6. Financial Advisor

    Advising FAs: Explaining Annuities to a Client

    Conceptually speaking, annuities can be thought of as a reverse form of life insurance.
  7. 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.
Frequently Asked Questions
  1. Why is social responsibility important to a business?

    Take social responsibility seriously, and your business could benefit from happier, more productive staff members while helping ...
  2. Which socially responsible retailers appeal most to ethical investors?

    Learn why ethical investors have many options in the retail sector, and discover which retail companies are most popular ...
  3. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  4. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
Trading Center