A Glimpse of Annuity Tax Benefit and Death Benefit

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<h1>A Glimpse of Annuity Tax Benefit and Death Benefit</h1><strong> Author: <a href='http://www.articleseen.com/profile_Simon Cronje.aspx'>Simon Cronje</a></strong><br /><p>What is an Annuity? Most people have no idea what the word "Annuity" means. Because you do not know what an annuity is, you may not consider investing in an annuity contract. Reading annuity sales brochures, deciding if you will purchase one, and knowing what type to buy is no easy task. Let’s cut through the complexity of annuities to help you determine whether they are the right long-term product for your future. Annuities are retirement planning tools that have two phases--accumulation and annuitization. During the accumulation phase, you pay a specified amount to an insurance or investment company over a period of time or in a lump sum. Your money earns a rate of return called interest. During the annuitization phase, you can begin withdrawing regular payments (such as monthly or annually) from your annuity contract until you die. Annuity Death Benefit The annuity has a death benefit. This benefit is not like one in a life insurance policy. Upon your death before you have begun the annuitization phase, your beneficiary will receive either the current value of your annuity or the amount you have paid into it, whichever amount is higher. For instance, if your investments are performing poorly when you die and your account value is less than what you have paid in, your beneficiary would receive the amount you paid in. When you annuitize (begin receiving payments), the death benefit is no longer available on your contract. If you annuitize at age 65 and die at age 67, the insurance company keeps your money. If you want your beneficiary to continue receiving payments after your death, you can buy "term certain" annuities. These annuities guarantee that either you or your beneficiary will receive payments for a certain period of time, such as 10 to 15 years. For example, if you died three years after you began receiving payments from a 10-year term certain annuity, your beneficiary would still receive payments for the next seven years. Annuity Tax Benefits The money that you pay into your annuity grows tax-deferred. This means that your money is not taxable until you begin to receive payments from your annuity. Once you receive payments, your gains are assessed taxes at your ordinary income tax rate. If you die before you annuitize, your beneficiary pays taxes on the death benefit. In either case, the person who receives the money (the annuity holder or your beneficiary) is taxed at his or her ordinary income tax rate. Who Should Buy Annuities? An ideal annuity candidate is 55 or older. Younger investors find the ten percent tax penalty for early withdrawal unappealing. Unless withdrawal occurs for death or disability, a penalty must be paid for withdrawing before age 59 ½. If you have already retired and need annuity income right away, consider buying immediate annuities. Immediate annuities skip the accumulation phase and begin to issue payments as soon as you invest in the contract. Exchange Your Annuity Another option you may want to consider is switching one annuity for another. You can do this without paying taxes. Exchanging one contract for another is a 1035 exchange (named after Section 1035 of the federal tax code). In a 1035 exchange, you can exchange one life insurance policy for a completely different life insurance policy, an annuity for another annuity, or a life insurance policy for an annuity without paying taxes; however, you cannot exchange an annuity for a life insurance policy without paying taxes on the gains in your annuity contract. Do you need to tap into your money before the surrender period? Some insurers will allow you to access a small percentage of your investment, about 10 to 15 percent, under certain circumstances such as serious illness or disability. After the surrender period, you can withdraw as much money from your annuity as you want. Just remember that any money you withdraw before age 59½ is subject to a ten percent penalty tax. If you made your maximum contribution to your existing tax-deferred retirement plan (401(k), 403(b), or IRA), you are the ideal annuity buyer. That's because you are already building up tax-deferred money in those plans, and the fees associated with those savings vehicles usually are much lower than those of Annuities. </p><strong>About the Author:</strong><br />Simon Cronje is a business consultant who has good information on <a rel="nofollow" href="http://www.totalreturnannuities.com/">Annuities</a> and <a rel="nofollow" href="http://www.totalreturnannuities.com/">annuity</a>. For more information visit <a rel="nofollow" href="http://www.totalreturnannuities.com/">http://www.totalreturnannuities.com/</a>.<p> Article Source: <a href='http://www.articleseen.com/Article_A-Glimpse-of-Annuity-Tax-Benefit-and-Death-Benefit_40627.aspx'> http://www.articleseen.com/Article_A Glimpse of Annuity Tax Benefit and Death Benefit_40627.aspx</a></p>

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Keywords : Annuities, annuity,

Category : Finance : Finance