An annuity is a specific type of contract offered by financial institutions like insurance companies. There are numerous variations and options available depending on the company issuing the contract, but the purpose of an annuity is to allow a person to grow their money, and then receive a stream of payments at a later date.
CBC Settlement Funding frequently works with the nine most common types of annuities: fixed, variable, immediate, deferred, indexed, inherited, qualified, non-qualified and lottery.
Immediate annuities begin paying out as soon as the policy is purchased. The frequency and size of the payments are determined by the amount initially invested, and the buyer’s elections.
Deferred annuities pay out years after a policy is purchased. Some annuitants prefer deferred annuities because they allow for periodic premium payments and compound interest earnings over time.
As opposed to a fixed annuity, buyers can choose their own investments with a variable annuity. This allows for greater returns, although there is risk involved, as well.
Fixed annuities provide a guaranteed rate of return and a set monthly payment amount that remains constant for the life of the contract.
Indexed annuities can yield greater returns because they track a stock index, or a group of stocks in the same business sector. The stock index performance determines interest gained.
If the original annuitant of a period certain annuity passes away before the end of the term, a predetermined beneficiary will inherit the annuity and collect all the remaining guaranteed payments.
Qualified vs. Non-Qualified Annuities
Qualified annuities are funded with pre-tax money, and are typically used by employers for tax-deferred retirement plans. Non-qualified annuities are funded with after-tax dollars, and only gains are taxed.
Lottery winners can receive their winnings as a lump sum, or an annuity payout. If they elect an annuity, their winnings will be used to purchase an annuity.