2 August 2012 0 Comments

Annuity Tutorial (Part 2)

Continuing on my overview of Immediate Annuities, I will concentrate on those that provide income guaranteed for life. After all there are many investments that can be constructed to guarantee income for a fixed period, but the lifetime guarantee of annuities cannot be duplicated with any other financial instrument. Additionally, the taxation of Immediate Annuities spreads the tax over the duration of the income stream so a portion of each payment is excluded from income until the cost basis has been recovered from this excluded amount.

Here are examples of the monthly income and the amount excluded from tax for various lifetime income options based on a single premium of $100,000 for a male annuitant, age 70.*

Type of Annuity Monthly Guaranteed Income Tax Exclusion…

  • Life Only $656.10 $520.94
  • Life with 120 months certain $611.27 $478.62
  • Life with 180 months certain $565.43 $421.81
  • Life with Installment Refund $568.94 $436.38
  • Life with Cash Refund $559.54 $421.89

*Assumes annuity is issued in California with non tax qualified funds.

Look at all your options before making a decision because once you make it, there is no turning back. Here are my thoughts about purchasing an Immediate Annuity:

  • Don’t use more than 25% of your liquid assets.
  • Inflation is not taken into account on future income payments.
  • If another person is dependent on your income consider a joint annuity.
  • If you have a life shortening illness ask to see enhanced annuity rates.
  • Shop for the best payout from financially strong companies.

Immediate Annuities used for lifetime payouts will generally not be attractive for people who are under age 65, but seniors who are concerned about outliving their income can provide a base of guaranteed income and a huge comfort cushion.

Next I’ll cover Deferred Annuities: Fixed, Indexed and Variable. Do they make sense for you?

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