Funding an Annuity: What Are the Options?

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Funding an Annuity: What Are the Options?

Posted On : Dec-27-2010 | seen (323) times | Article Word Count : 527 |

At the simplest level, annuities are funded when you make payments (premiums) now in order to receive payments (return of premiums and any earnings) later. However, annuity payments made prior to age 59½ may be subject to a 10% federal tax penalty unless an exception applies. Some annuities are funded with one payment (single premium annuities), and some are funded over time (flexible premium annuities).
There are also some annuities that are not funded with cash at all. These are charitable gift annuities, and they're often funded with appreciated assets to gain special tax benefits.
Single premium annuity
As you might expect, with a single premium annuity, you (the purchaser) pay one premium. If it is a deferred annuity, payouts begin at a later date, perhaps years in the future. A single premium immediate annuity (immediate annuities are only funded with a single payment) usually requires a distribution starting date that is within one year of the annuity contribution.
The single premium annuity is also used in other situations. When a defined benefit pension plan is terminated, the accrued benefits under the plan are determined for each plan participant, and a single premium annuity may be purchased for each plan participant (with benefits usually starting at age 65).
Another common use is in the structured settlement of lawsuits. In these cases, the parties agree to pay a sum of money not as a lump sum, but as a series of payments (often for the life of an injured party). A monthly amount to be paid is agreed to by the parties, and an annuity is purchased that provides that amount.
Periodic annuity funding
Although deferred annuities can be funded with a single premium, mostly they are funded over a period of time. Periodic payments can be made until the annuity payout period begins. Annuities that utilize periodic funding can be divided into two categories:
• Level premium funding: Premium payments are made on a regular, ongoing basis. Payments can be made either monthly or annually, depending on the terms of the contract.
• Flexible premium funding: Premium payments are flexible and can occasionally be skipped. The insurer may impose an annual minimum and maximum on the amount of premiums that can be paid in.
Charitable annuities
Individuals who plan to give away substantial assets at death to qualified charities have a special funding option available that may help lower their current taxes, as well as provide a guaranteed income stream for life. (Guarantees are subject to the claims-paying ability of the issuing insurance company.)
With a charitable remainder annuity trust, an individual (the donor) makes an irrevocable transfer of assets to a trust whose beneficiary is a qualified charity. The trust pays a fixed amount to the income beneficiary, who may be the donor or someone the donor chooses, based on the value of the assets and the age of the income beneficiary. At the income beneficiary's death, the trust assets go to the charity.
The donor can take a current tax deduction for a percentage of the amount gifted, based on the present value of the charity's right to receive assets at the income beneficiary's death.

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<h1>Funding an Annuity: What Are the Options?</h1> Author: <a href='http://www.articleseen.com/profile_beamalife.aspx'>beamalife</a> At the simplest level, annuities are funded when you make payments (premiums) now in order to receive payments (return of premiums and any earnings) later. However, annuity payments made prior to age 59½ may be subject to a 10% federal tax penalty unless an exception applies. Some annuities are funded with one payment (single premium annuities), and some are funded over time (flexible premium annuities).
There are also some annuities that are not funded with cash at all. These are charitable gift annuities, and they're often funded with appreciated assets to gain special tax benefits.
Single premium annuity
As you might expect, with a single premium annuity, you (the purchaser) pay one premium. If it is a deferred annuity, payouts begin at a later date, perhaps years in the future. A single premium immediate annuity (immediate annuities are only funded with a single payment) usually requires a distribution starting date that is within one year of the annuity contribution.
The single premium annuity is also used in other situations. When a defined benefit pension plan is terminated, the accrued benefits under the plan are determined for each plan participant, and a single premium annuity may be purchased for each plan participant (with benefits usually starting at age 65).
Another common use is in the structured settlement of lawsuits. In these cases, the parties agree to pay a sum of money not as a lump sum, but as a series of payments (often for the life of an injured party). A monthly amount to be paid is agreed to by the parties, and an annuity is purchased that provides that amount.
Periodic annuity funding
Although deferred annuities can be funded with a single premium, mostly they are funded over a period of time. Periodic payments can be made until the annuity payout period begins. Annuities that utilize periodic funding can be divided into two categories:
•	Level premium funding: Premium payments are made on a regular, ongoing basis. Payments can be made either monthly or annually, depending on the terms of the contract.
•	Flexible premium funding: Premium payments are flexible and can occasionally be skipped. The insurer may impose an annual minimum and maximum on the amount of premiums that can be paid in.
Charitable annuities
Individuals who plan to give away substantial assets at death to qualified charities have a special funding option available that may help lower their current taxes, as well as provide a guaranteed income stream for life. (Guarantees are subject to the claims-paying ability of the issuing insurance company.)
With a charitable remainder annuity trust, an individual (the donor) makes an irrevocable transfer of assets to a trust whose beneficiary is a qualified charity. The trust pays a fixed amount to the income beneficiary, who may be the donor or someone the donor chooses, based on the value of the assets and the age of the income beneficiary. At the income beneficiary's death, the trust assets go to the charity.
The donor can take a current tax deduction for a percentage of the amount gifted, based on the present value of the charity's right to receive assets at the income beneficiary's death.

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