Annuities
Accumulation and payout
An annuity is a contract that protects against outliving income. During accumulation, premiums grow tax-deferred; during annuitization, the insurer converts the account into periodic payments. Immediate annuities begin payouts soon after purchase; deferred annuities accumulate first. Fixed annuities guarantee a rate; variable annuities invest in separate accounts and require securities registration; indexed annuities credit interest by an index formula with caps and floors. Payout options include life only, life with period certain, joint and survivor, and refund or installment refund. The exclusion ratio determines the tax-free portion of each payment because premiums were paid with after-tax dollars; gains are taxable. Surrender charges, market value adjustments, and a 10% federal penalty on pre-59½ withdrawals may apply.
The owner controls the contract, the annuitant's life measures payout, and the beneficiary receives any death benefit. Suitability and replacement disclosure are critical. Traps: calling an annuity life insurance; assuming variable annuity principal is guaranteed; forgetting that annuitization is generally irrevocable; and ignoring beneficiary designations. Worked rule: before annuitization, the contract is an accumulation vehicle; after, it is a payment stream. Example: a deferred fixed annuity bought at 60 may be annuitized at 70, with payments taxed under the exclusion ratio.