In-Line

Insurance & Annuities

John C. Gilbert, MBA

Annuities

An annuity is a contract in which the policyowner pays a single premium or a series of premiums to an insurer. The insurer then promises to provide a series of periodic payments at the time when the owner makes such an election, provide a death benefit , or return the cash surrender value to the owner upon request. Some policyowners elect an anuitization option once they retire and need to supplement their income with additional monies. Many annuity policyowners use their annuity as a tax-deferred savings vehicle.

Single Premium Deferred Annuity (SPDA)

An SPDA is a tax-deferred annuity that will only accept a single payment. This payment may be from writing a check directly to the company or through a transfer or rollover. Single Premium Deferred Annuities may be purchased with qualified or non-qualified monies. (See Plan Types below)

Flexible Premium Deferred Annuity (FPDA)

An FPDA is a tax-deferred annuity that will accept multiple premium payments while the annuity is in an accumulation period. FPDA annuities may accept salary reduction payments, bank draft or pre-authorized check plan payments, transfers, rollovers, and single sum direct payments. Some Flexible Premium Deferred Annuities require ongoing payments while others do not. FPDAs may be purchased with qualified or non-qualified monies. (See Plan Types below)

Equity Indexed Annuity (EIA)

An Equity Indexed Annuity is a fixed annuity with alternate methods of determining and crediting interest. While traditional fixed annuities typically declare interest in advance for premium payments based on the performance of the company's underlying investments for those premiums, an EIA's interest is determined, at least in part, by the performance of a specified index of marketplace performance (frequently the S&P 500 Index®) over a stated period. Different EIAs present different methods of determining the interest credits.

Unlike traditional fixed annuities, the policyowner may receive zero interest for a single period on a specific premium payment if the index performs poorly*. However, with most EIA designs, the premiums are protected due to a decline in an index. Because it is an annuity, the EIA offers important insurance features including tax deferral, a death benefit that may be paid outside probate, and annuitization.

Plan Types

Non-Qualified

Non-Qualified annuities are annuities that are applied for with after-tax monies. The premium that is placed in the annuity policy would have already been taxed to the policyholder prior to placing the monies in the annuity. The interest that is earned in the annuity is tax-deferred until withdrawn. Under current tax law, all withdrawals from an annuity purchased with non-qualified monies are taxable only to the extent there is a gain in the policy. Except under certain conditions, the IRS will impose a penalty tax on withdrawals made prior to age 59½.

Qualified

Qualified annuities are annuities that are applied for with pre-tax monies. The premiums that are placed in the annuity have not yet had income tax paid on them by the policyholder. Dependent upon the type of qualified plan, the taxpayer may receive a tax-deduction when opening the plan. Other types of qualified plans allow an employer to direct the monies on the employee's behalf to the insurance company. These monies are deducted pre-tax from the employee's paycheck. Except under certain conditions, the IRS will impose a penalty tax on withdrawals made prior to age 59½. All withdrawals made from annuities with pre-tax contributions are taxed as ordinary income.

Contact Information

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