What Is Annuity Consideration?
An annuity consideration or premium is the money an individual pays to an insurance company to fund an annuity or receive a stream of annuity payments. An annuity consideration may be made as a lump sum or as a series of payments, often referred to as contributions.
- An annuity consideration is a payment or premium made to fund an annuity.
- Annuities can be structured in many ways, such as immediate or deferred, fixed or variable, and qualified or non-qualified.
- Immediate annuities generate payments upon issue, after consideration is received.
- Deferred annuities allow account holders to remit contributions to earn interest and postpone receiving payments until a later date.
How Annuity Considerations Work
Account owners who receive annuity income payments can choose different frequencies of distribution, such as monthly, quarterly, semiannually, or annually. Payments are based on several factors, including the amount of the annuity consideration or accumulated value of an existing deferred annuity, the age at which the annuitant begins receiving payments, the annuitant's life expectancy or the length of the term, the annuity's anticipated investment returns, and whether the annuity is fixed or variable, and guaranteed for a specified amount of time or for the lifetime of the annuitant. Payments guaranteed for a shorter-term are often higher.
How Annuities Work
Annuities can be structured according to a wide array of details and factors. Immediate annuities generate a stream of payments upon issue. Deferred annuities are retirement products in which payments are deferred until initiated by the account owner. Account-holders may remit contributions into their accounts to earn interest; depending on the tax structure (e.g., qualified or non-qualified), considerations or contributions may be limited. Annuitizing the deferred annuity prompts the payout feature, in which a stream of payments are made.
Payments can be guaranteed for the annuitant's life or a certain period (e.g., 5, 10, or 20 years).
Americans may find more annuity offerings in their 401k plans due to the passage of the "Setting Every Community Up for Retirement Enhancement" (SECURE) Act. The new law makes it easier for employers to offer annuity products within an employee's 401(k) account. Prior to the passage of the bill, employers were responsible for products offered to their employees in a retirement portfolio, but under the new law, the responsibility will lie with the insurance companies offering the annuity options to the employees. Experts believe employers will feel more comfortable offering annuity products under the new law.
Annuities can be structured generally as either fixed or variable. Fixed annuities earn fixed rates of interest and often have a minimum guaranteed rate. Variable annuities allow account owners to invest in funds tied to the market. Most variable deferred annuities have a fixed account, which provides a hedge of protection against market fluctuations. Some immediate annuities contain a variable account, allowing the owner to invest different funds. For this reason, payments from these annuities often vary.
Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Examples of life guaranteed annuities include the life only annuity (payments are guaranteed for the annuitant's life only) and the life with a guaranteed period annuity (payments are guaranteed for the annuitant's life but if he/she deceases within the guaranteed period, the remaining guaranteed payments are paid to his/her beneficiary. Alternatively, annuities can be structured to pay out funds for a specific period, such as 20 years.
These instruments are not for everyone, especially those who may need access to their money. Deferred annuities often have surrender schedules, in which all or a portion of withdrawn money is subject to a penalty. Fees during the surrender period can be high, more so in the early years of ownership.
These surrender periods can last anywhere from two to more than ten years, depending on the particular product. Surrender fees can start at 10% or more, though the penalty typically declines annually over the surrender period. For some immediate annuities, surrenders are not possible after payments begin.
Some advisors argue that investors looking for a stream of payments can structure their annuity-like instrument with a combination of dividend-paying stocks, bond ladders, and money markets. Among the advantages of this approach are low fees and ready access to your cash.