Annuity Premium Payment Methods Explained

Single premium annuities are often the ideal vehicles for people who have come into large cash sums. A single premium annuity will convert such amounts, for example, from an inheritance, from the sale of a business or a large piece of real estate, or from a qualified pension or profit-sharing plan lump-sum distribution, into a lifetime or certain fixed-period stream of payments. Immediate annuities are virtually always single-premium annuities (clients with subsequent investment amounts would simply purchase another immediate annuity). Single-premium structures also occur sometimes with deferred fixed annuities that provide for guaranteed interest crediting rates for a specified period (to prevent subsequent investments at these guaranteed rates if general interest rates decline in the future). Single-premium structures are relatively rare amongst deferred variable annuities.

Fixed-premium annuities are favored by investors who do not have large cash sums to invest but who desire a regular investment program with a forced saving feature. Typically, these instruments require purchases to make fixed annual (semiannual, quarterly, monthly or even weekly) premium payments that continue until the desired annuity starting date (the date when payouts begin). Because the periodic premiums are fixed, the total accumulation, and therefore the ultimate annuity payout is very predictable. Fixed-premium annuities today are relatively uncommon, having been replaced instead by flexible-premium annuities.

Flexible-premium annuities allow the contract owner to invest (make premium contributions) at any time and in any amount desired. In rare instances, the insurance company requires certain minimum annual contributions within the first few years, but after this initial period (or from the start in most cases) the insurers generally place no restrictions or requirements on purchasers with regard to the timing or amount of further contributions.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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