An Annuity is a unique financial product that provides tax deferral of interest and capital gains and the option of a guaranteed monthly income which you can not outlive.
Accumulation Period
During the accumulation period of an annuity, all premium payments are invested in either a fixed account, also known as a guaranteed account. Your principal and the interest rate are guaranteed by the company. Interest rates a usually guaranteed for one year however increasingly guaranteed annuity rates are available for longer durations.
Distribution Period
During retirement funds can be withdrawn from the contract and the owner has several options to chose from.
Withdrawals may be made at any time from the contract, prior to retirement as well, usually with a minimum dollar amount at the option of the owner.
Systematic Withdrawal Plan enables the owner to pre-authorized periodic withdrawals. The owners of the contract instruct the company to withdraw a percentage or a level dollar amount from the contract on a monthly, quarterly, semiannual, or annual basis. Checks are sent directly to the owner or can be deposited directly into the owners checking account.
Fixed Account
The owner of the contract may transfer all or part of the value of the contract to the fixed account, sometimes called the guaranteed account, and elect to annuitize those funds. In essence, the owner of the contract for a fixed dollar amount, purchases a monthly income which will be paid to him/her until death.
For instance, a 68 year old male could receive a monthly income which would be payable to himself as long as he is alive, or to his beneficiary should he die within the first 10 years. This option is known as "Life Annuity with Payments for a Guaranteed Period", in this case the guaranteed period is ten years.
Contracts, when issued, include a "payout table" stating the minimum payout guaranteed by the company based on age and sex (according to state law). When the contract is annuitized the payout will be based on the higher value of the guaranteed amount stated in the table or the current values used at that time.
In this example according to the payout table, for every $1,000 which is annuitized under the "Life Annuity with Payments Guaranteed for 10 Years Option" the monthly payout would be $5.68. This is what was guaranteed at the time the contract was issued however the current payout rate which the company is using is $7.93. All payout rates are expressed as dollars per period (monthly, quarterly, semiannually, annually) per $1,000 dollars.
Therefore if this individual elected to annuitize $30,000 under this option his monthly payout would be $237.90 per month. This dollar amount is guaranteed to be paid to him as long as he is alive. Should death occur in the first ten years his beneficiary would receive the difference between 10 years of monthly income and the amount he actually received.
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