Lump Sum Annuity

What is a Lump Sum Annuity?

A lump sum annuity is a retirement savings plan sold by financial institutions or insurance companies. Within an annuity plan, the purchaser or annuitant pays an investment sum to the insurance company which subsequently becomes structured settlement companies payment to the annuitant.

An annuity is thought of as an excellent insurance product for maintaining one’s quality of life after retiring. When compared  to other retirement saving plans, annuities offer better benefits such as a more flexible premium payment option, no limit to the contribution amount, higher rates of interest earnings, tax advantages plus a regular income for the life of the annuity. An annuity is also considered to be a great option for providing for a child's educational requirements.

How does an Annuity Work

In simple terms annuities are financial contracts made between a financial institution and the annuitant. Normally the companies selling or acting as the issuer of the annuities are insurance companies. The person purchasing an annuity is referred to as the buyer. In a lump sum annuity the annuitant makes a  lump sum payment to the insurance company and under the terms of the annuity agreement the  insurance company will make periodic payments to the annuitant over a specified period of time.

An annuity plan comes in two parts

These two parts are the accumulation and distribution phases.
The accumulation phase naturally is when the annuitant makes their deposit which will either be in the form of a lump sum payment or through regular payments to the insurance company.
The distribution phase then is when the insurance company makes it’s periodic payments to the annuitant. An annuity plan is commonly associated with a life insurance product where the lump sum or structured settlement payments are made to a beneficiary where the buyer dies before receiving their annuity payments.

The structured settlement payment to the annuitant is allowed when the buyer reaches a certain age. This age is commonly set by the insurance company at 59 ½ years old.It is only then that the periodic annuity payments may be withdrawn. Earlier withdrawals may be possible but there would be taxation and transaction charges involved.

The taxes applied would be 10% of the invested money along with regular tax payment rates on the interest earned. Surrender charges are calculated by the insurance company depending upon when the withdrawal is made and from what annuity plan. The buyer of an annuity plan should assess his or her options and understand all the terms of the annuity before purchase.

Types of Annuity

Generally speaking there are two types of annuities those being fixed and variable.
In a fixed annuity plan, the insurance company guarantees a fixed interest rate for the period in which the annuitant is accumulating the money. In the fixed annuity a regular payment will be made over a specific period of time i.e. 25 years or for the length of  the buyer’s or spouse’s lifetime.

A variable annuity will when the buyer’s payments are invested in different investment plans. The annuitant select which type of investment options they prefer which is usually some sort of mutual fund. The interest earned and the periodic payment are dependent upon how the chosen mutual funds perform. While the variable annuity is a higher risk it can offer higher interest rates and better periodic payments over the safer fixed annuity plan.

Depending on the annuity payment options chosen by the annuitant the payment may be immediate or deferred. Obviously within an immediate annuity agreement the lump sum payment or structured payments start straight away while with a deferred annuity payments a lump sum annuity is paid at a pre-determined time in the future.

A single premium type annuity is when the payment is made in one lump sum and it is referred to as a regular payment annuity if the payments are made over time.