Buying Insurance

Lesson 5: Annuities

Types of Annuities

There are two basic types of annuities: deferred annuities and immediate annuities. The terms are largely self explanatory. A deferred annuity is one structured to pay the beneficiary a guaranteed income at some point in the future. An immediate annuity is one structured to begin guaranteed payments immediately, and thus requires a lump sum payment to the insurance comany at the outset. There can be as many as three separate people involved in an annuity. The first is the owner. This individual owns the policy and therefore is entitled to make all the contractual choices. The owner names the beneficiary or beneficiaries, decides when the payments from the annuity will begin (insurance jargon: annuitizes the policy), and determines the length of time over which the payments will be made. Secondly, there is the annuitant. The insurance company uses this individual's age and sex as a basis for computing the amount of the eventual payout. The owner and the annuitant may be one and the same person, or they may be different persons. Finally, there is the beneficiary. This is the individual designated in the policy to receive the eventual, or in the other case immediate, payout from the annuity. The benficiary will be someone who the owner wishes to receive the funds if the owner himself does not survive to date of payout. (Buyer beware:annuities are financial contracts and can have signficant income tax implications. Consult with your tax advisor before making any final purchase decisions).

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