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Friday, Nov. 28, 2014

Don't outlive your income

Thursday, October 23, 2008

What would you say about an insurance policy that claims to provide guaranteed income for the rest of your life or a specific period of any time? Possible income that you cannot outlive? Does it sound too good to be true? That is the principle behind annuities offered by many insurance companies.

For either a lump sum or series of premium payments, an insurance company will promise to pay you an amount determined by what you have paid in, interest rates, the options you choose as well as your life expectancy. You can select between fixed annuities that are based on interest rates or variable annuities that allow you to allocate premiums to sub-acconts that invest in underlying funds.

You may also select between a deferred annuity, which allows for time to accumulate funds, or an immediate annuity for a lump sum payment, which provides income immediately.

An immediate annuity is a popular choice for persons who have a large sum of money at their fingertips. The funds could possibly come from either a 401(k), IRA or other source. Rather than make systematic withdrawals from those types of accounts, people have chosen to withdraw the entire amount to purchase a single premium immediate annuity.

Once the lump-sum premium is paid, the owner of the annuity, also called the annuitant, begins receiving pay outs based on a chosen schedule.

One possible option would be payments for the life of the owner with a specified number of years guaranteed. The original purchase amount and estimated number of payments to be made with help determine the size of annuity payments. A deferred annuity is a popular choice for persons wishing to accumulate funds for retirement.

During retirement, the annuitant converts accumulation units into annuitization units fort he purpose of receiving payments on a regular basis. These payments may also be lie long with guaranteed payments for a specified number of years. If the owner chooses the Joint and Last Survivor option, income is guaranteed for the annuitant's or co-annuitants's lifetime, whichever is greater and may also be taken over a specified period. Pleased note that withdrawals prior to age 59 1/2 may be subject to a 10 percent federal income tax penalty.

Other choices include provisions to pay designated beneficiaries any remaining income, less what may have already been paid to the annuitant. This payment would be in the form of a lump sum, giving the beneficiary a number of options on how best to use the money.

Variable products involve investment risk, including possible loss of principal. Withdrawals and under-performance of its sub-accounts will have the effect of decreasing cash values and the death benefit. Withdrawals in excess of the cost basis are taxable. Because variable annuities and their sub-accounts are subject to market risk, their value can fluctuate. As such, their performance is not guaranteed, and you may receive more or less than the original investment amount. In choosing an investment, you should consider your financial goals and willingness to accept risk.

There are charges and fees associated with an immediate annuity. Those include an annual administrative fee of $30, mortality and expense risk charges and fund expenses, including advisory fees and other expenses. Surrender charges may also apply.

With many options, the income received by the owner cannot be outlived. The insurance company through which the annuity was purchased guarantees payments for the life of the owner.

Depending of the type of annuity purchased, those payments may be a significant addition to retirement income from other sources such as Social Security or employer pension plans.