Single Premium Deferred Annuity

In-Depth Description - Single Premium Deferred Annuity

Annuities are either deferred or immediate.

• Deferred annuities provide income payments that begin at a later date. The primary reason for purchasing a deferred annuity is to accumulate money on a tax-deferred basis, which can then provide an income at a later date.
• Immediate annuities are contracts which begin paying installments generally within 12 months of the premium payment. The main reason for purchasing an immediate annuity is to obtain a regular income, most frequently for retirement purposes.

Deferred annuities can be either single premium or flexible premium.

• Single premium contracts, commonly referred to as Single Premium Deferred Annuities (SPDAs), do not permit additional premiums after the initial premium.
• Flexible premium contracts on the other hand permit the contract owner to make additional contributions after the initial premium.

Annuities may be either fixed or variable.

• A fixed annuity provides for tax-deferred accumulation at a fixed rate of interest.
• The value of a variable annuity is dependent upon the performance of an underlying portfolio of investments such as stocks, bonds and money market accounts.

Income Tax Considerations

• Non-Qualified Annuities
• Under current tax law, a contract owner is not taxed on increases in the value of an annuity contract until distributions occur, either as a lump sum, withdrawal or as annuity payments. For a lump sum payment received as a total surrender, the recipient is taxed on the portion of the payment that exceeds the cost basis of the contract.
• Withdrawals are taxable up to the amount of contract earnings.
• For annuity payments, the taxable portion is determined by a formula which establishes the ratio that the cost basis of the contract bears to the total value of the annuity payments for the term of the annuity contract.
  Note: Annuity distributions that begin prior to age 59 1/2 may be subject to a 10% federal penalty tax.
• The above information does not necessarily apply to Qualified contracts (contracts used under various types of Qualified retirement plans), separate tax withdrawal penalties and restrictions apply.
• #1 Insurance Quotes Life Disability Insurance does not provide tax, legal or accounting advice. The above information is based upon the Company's understanding of current federal income tax law applicable to annuities in general. Purchasers are cautioned to seek competent tax advice regarding the tax consequences of annuities.