The word annuity has its origins in a Latin term that means “annual.” Today, an annuity is an investment product sold by insurance companies.

Annuities can be purchased through a series of contributions or in one lump sum. The money put into the annuity contract is allowed to grow for a period of time. Then, at a future date, the contract is annuitized and annuity begins paying an income through periodic payments over a specified period of time or for a lifetime. The interest or growth in a “deferred” annuity is not taxed until the annuity is actually paid and received by the owner.

Equity-Indexed Annuity

An equity-indexed annuity is a type of annuity that grows and earns interest based on a formula related to a specific what is viagra used for stock market index.

EIA Common Terminology

Although EIA contracts share the same objectives, they can vary a great deal. Here a important terms to help you understand your options:

Term: The length of time of a penalty period or the time an investor has the option to renew.

Typically a term is a period of three to seven years.

Participation rate: Also known as the index rate, the percentage rate reveals how much a contract will grow. For example: “75% of the Standard and Poor’s index increase for the calendar year” means that if the Standard and Poor’s 500 index increases 10% for the year, the contract receives a 7.5% increase in credit. Often, the rate is 100%. The insurance company can change the participation rate.

Cap rate: The annual maximum increase in percentage allowed. For example, if the contract’s cap rate is 7% and the chosen market index increases 15%, then the increase is limited to 7%. The insurance company can change the cap rate and some contracts do not have a cap rate.

Floor: The minimum guaranteed amount credited to the contract, typically in the two to three percent range.

Reference or contract value: The amount the investor is entitled to. For example, the greater of the current account value less any remaining surrender charges.

Anniversary date: The date that marks the beginning of the term used to measure how much the annuity contract has grown.

Other factors:

Guaranteed death benefits: If annuitant (contract owner) dies before the annuity begins paying, some contracts pay the named beneficiary the greater of the investment (less withdrawals) or the contract value on the death date.

Regulation: Even though the stock market influences the EIA, the laws that regulate securities, such as stocks and bonds, do not currently apply to an EIA. This may change on January 12, 2011. Rule 151A, if it stays alive, would bring EIAs within the influence of federal security laws. This would mean that a prospectus explaining how annuity contract works, detailing the risks, and lists all charges that may be levied must be provide to the buyer. And only those who have both a securities and insurance licenses may sell EIAs.

Contract fees and charges: Even though many EIA’s do not have any fees associated with them, some contracts may be subject to fees and charges. Make sure you know what you are buying. These fees include:

* administrative fees that cover the insurer’s basic expenses,

* mortality risk charges to cover the cost of any guaranteed death benefit provisions,

* And surrender charges for withdrawals in excess of a certain amount or if the contract is completely surrendered.

Surrender charges can range from 0 to 15% and decline over time. Surrender charges result in a redemption that’s less than the principal amount invested.

Taxes on Annuity Payments:

How payments from an annuity may be taxed varies, depending on the life cycle of the annuity. Based on federal law, generally the following rules may apply: Before annuitization: Any funds withdrawn from an annuity contract prior to annuitization (before payments begin) are considered to be from interest or other growth. These earnings are taxable just like ordinary income. If the annuity owner is under age 59 1/2 at the time of withdrawal, the earnings are also subject to a 10% IRS penalty. If earnings are completely withdrawn and the payments are made from the owner’s initial investment, the withdrawal is treated as recovery of capital and tax free. Changes to the annuity contract, including loans, collateral assignments, and changes in ownership may be taxed.

After annuitization: Annuity payments are treated a part earnings and part capital return. The earnings portion is taxable. Once the owner has completely recovered his or her investment, all remaining payments are fully taxable as income.

Estate taxes: Amounts paid to a beneficiary after an owner’s death are included in the owner’s gross estate. If the owner of a life-only annuity contract dies, no payments are due and nothing is includable in the estate.

Income in respect of a decedent: Payments received by the beneficiary are still subject to income tax. However, the beneficiary may be eligible Viagra Professional for a federal income tax deduction for a portion of the estate tax paid.

SUMMARY: An Equity Indexed Annuity with an Income Rider is a contract between you and the insurance company which provides:

1) Guaranteed return of principal,

2) Returns linked to an index (subject to a cap),

3) Credited gains cannot be lost,

4) Guaranteed minimum interest,

5) Liquidity features (nursing home, critical illness & 10% annual withdrawal),

6) Taxes not due until withdrawal,

7) Avoidance of Probate,

8) Protection from creditors,

9) No annual fees (other than the cost of the rider depending on the carrier) and

10) guaranteed income you (or you and your spouse) cannot outlive.

When you are in the market for an Equity Indexed Annuity you will find that there are many different options available, choosing the one that will best fulfill your goals for investment will require due diligence. This is why it is very important that you have a financial advisor whom you trust and can help you make these decisions.

Author Bio: Lisa Cintron is Executive Vice President at OnlineAnnuityRates.com, an annuity guide to help you through the process of due diligence when researching Levitra Professional pension annuity rates as well as immediate and accurate annuity rates and quotes.

Category: Finances
Keywords: pension annuity rates