Before Sell Annuity Payment let’s
check what is an annuity is? An annuity is a contract between you and an
insurance company in which you make a lump sum payment or series of payments
and in return obtain regular disbursements beginning either immediately or at
some point in the future. The goal of annuities is to provide a steady stream
of income during retirement as a summarize an annuity is a series of periodic
payments that are received at a future date and you can check your self-using
following Formulas,
Above formula
assumes that the rate does not change, the payments stay the same, and that the
first payment is one period away. An annuity that grows at a proportionate rate
would use the growing annuity payment formula. Otherwise, an annuity that
changes the payment and/or rate would need to be adjusted for each change. An
annuity that has its first payment due at the beginning would use the annuity
due payment formula and the deferred annuity payment formula would have a
payment due later.
An Annuity is mainly two types
The life of an annuity is the accumulation and
annuitization aspect. During the accumulation aspect, you can add funds to your
annuity contract by depositing cash, converting life insurance cash values. If
you follow the annuity rules, your annuity will accumulate earnings on a
tax-deferred basis until you make withdrawals.
When you can withdraw or sell annuity
payment?
Once you reach age 60, you can
begin to withdraw or sell annuity payment funds from the annuity without
penalty charges
Annuity Pay-out Options
There are a few different methods
for taking annuity pay-outs or sell annuity payment. The two most common
methods to receive cash pay-outs are the annuitization method and the
systematic withdrawal schedule. The other is taking a lump-sum payment. The
annuitization method gives you some guarantee of monthly income for a
determined period. Under the systematic withdrawal schedule, you have complete
control over the timing of distributions but no protection against outliving
annuity assets.
Annuitization Methods
Life Option
The life option typically provides
the highest pay-out because the monthly payment is calculated only on the life
of the annuitant. This option provides an income stream for life, which is an
effective hedge against outliving your retirement income.
Joint-Life
Option
This common option allows you to
continue the retirement income to your spouse upon your death. The monthly
payment is lower than that of the life option because the calculation is based
on the life expectancy of both the husband and wife.
Period
Certain
With this option the value of your
annuity is paid out over a defined period of your choosing, such as 10, 15 or
20 years. Should you elect a 15-year period certain and die within the first 10
years, the contract is guaranteed to pay your beneficiary for the remaining
five years.
Life with
Guaranteed Term
Many people like the idea of income
for life (which they get with the life option), but they are afraid to choose
that option in case they die soon. The life-with-guaranteed-term option gives
you an income stream for life (like the life option), so it pays you for as
long as you live. But with this option, you can select a guaranteed period,
such as a 10-year guaranteed term, for which your annuity is obligated to pay
to your estate or beneficiaries even if you die before that guaranteed period
is over.
Systematic
Withdrawal Schedule
Under this method, you can select
the amount of payment that you wish to receive each month and how many you want
to receive. However, the insurance company will not guarantee that you will not
outlive your income payments. How much you receive and how many months you
receive payments depends on how much you have in the account. The burden of
life-expectancy risk is on your shoulders.
Lump-Sum
Payment
Taking out the assets in your
annuity in one lump sum is usually not recommended because, in the year you
take the lump sum, ordinary income taxes will be due on the entire
investment-gain portion of your annuity. Clearly, this is a very inefficient pay-out
option from a tax minimization perspective.
The following pay-out options
assume there are two individuals that will be receiving benefits from the
annuity.
- Joint and full to survivor (no refund) – This option pays an income as long as one or more annuitant is living. Payments stop when both annuitants are deceased
- Joint and 2/3 to survivor (no refund) – This option pays an income while both annuitants are alive. When one dies, 2/3 income payments continue during the survivor’s lifetime. Payments stop when the second annuitant dies.
- Joint and full to survivor with period certain (10, 15 or 20 years) – Pays an income while at least one annuitant is alive. If both annuitants die before the specified period expires, payments of the balance of the period certain continue to the beneficiary.
- Joint and full to survivor with installments (refund) – This option pays a monthly payment during the lifetime of the annuitant with a guarantee that payments will be made for a certain number of months. The number of months is determined by dividing the accumulated amount of the annuity by the amount of the first monthly annuity payment. Only the number of months is guaranteed so there is no guarantee of a full refund.
- Joint and 2/3 to survivor with period certain (10, 15 or 20 years) – Pays an income while both annuitants are living. When one dies, 2/3 of the income payment continues during the survivor’s lifetime. If the second annuitant dies before the period certain expires, the 2/3 payment amount continues to the beneficiary for the balance of the period.
Guaranteed
Living Benefits
Guaranteed living benefits may be
found as a provision in an annuity contract or added by rider endorsement or
amendment to an annuity contract. There are 3 different types and can be very
complicated. One important thing to consider is whether or not the particular
contract you are considering purchasing allows these benefits to be assignable
or not. Be sure to read your contract carefully before purchasing. These
different guarantees provide a downside protection to an annuity contract. They
are tools to aid in the management of risk by transferring different risks from
the buyer to the insurer. There are different types of
Guarantees
defined as follows:
1. Guaranteed Minimum Withdrawal
Benefits (GMWB) – guarantees the return of at least the owner’s investment, or
that investment plus an interest component (the benefit base) through periodic
partial withdrawals of a certain percent or less of the benefit base, even if the
annuity cash value falls to zero. There is usually no waiting period.
2. Guaranteed Minimum Income
Benefit (GMIB) – guarantees that, regardless of actual policy performance, the
buyer is assured a certain minimum future income, but only in the form of a
regular annuity pay-out. It does not guarantee a lump sum.
3. Guaranteed Minimum Accumulation
Benefit (GMAB) – unlike the other guarantees the GMAB guarantees a minimum lump
sum at the end. Will You be Penalized if You Withdraw Money from Your Annuity?
In most cases “Yes.” However, some
annuities have a provision that permits you to withdraw a certain amount each
year, usually 10 percent of the annuity value, without having to pay a surrender
charge. Please remember, even though you may not have to pay a surrender charge,
there may be taxes to be paid on some or all of the money you withdraw. It is
recommended that you consult a tax advisor or your annuity insurance company
regarding the tax consequences before you make the withdrawal.
Important
Things to Consider
1. Review your own insurance needs
and circumstances. Choose the kind of contract that has benefits that most
closely fit your needs. Ask an agent or company to help you.
2. Be sure that you can handle the
premium payments. Ask about any possible increases in premium amounts and what
may cause an increase.
3. Don’t sign an application until
you review it carefully to be sure all the answers are complete and accurate.
4. Don’t drop one contract and buy
another without a thorough study of the new contract and the one you have now.
Replacing your insurance may be costly.
5. Read your policy carefully. Ask
your agent or company about anything that is not clear to you.
6. Periodically review your
insurance program with your agent or company to keep up with changes in your
income and your needs.
7. Do not buy a contract until you
have a good understanding of how it works. Are You Considering Dropping or
Replacing an Existing Annuity Contract?
If you are thinking about dropping
or replacing an annuity contract, here are some things you should consider:
- If you decide to replace your contract, do not cancel your old contract until you have received the new one. You usually will have a minimum of 30 days to review your new contract to decide if it is what you want.
- It may be costly to replace a contract. There may be substantial surrender charges that you will incur. Remember that if you have held your existing contract long enough and no longer have to pay surrender charges, purchasing a new contract may start a new period of surrender charges.
- Consider consulting a tax advisor to see if dropping your contract could affect your income taxes.
- You may have valuable rights and benefits in your existing contract that are not in the new contract.
- If the annuity contract you have now no longer meets your needs, you may not have to replace it. You might be able to adjust your existing contract or purchase an additional contract to get the coverage or benefits you now need.
- In all cases, if you are thinking of buying a new contract to replace your existing one, check with the agent or company that issued your existing contract. Before replacing, ask your agent or company for an updated illustration (in-force illustration). Check to see how the contract has performed and what you should expect in the future based on the guarantees.
Best of Luck...
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Referring Source : http://www.investopedia.com/articles/retirement/05/071105.asp
