PURCHASE ANNUITIES: VARIOUS SETTLEMENT OPTIONS

2007-03-08 10:33:40

( Financial )



Annuities are purchased in lump sum amounts from insurance companies. It earns interest and after a certain period you will be paid a periodic amount. Purchase annuities defer tax payments on interest earned until you withdraw the amount.

You can purchase annuity with floating interest rates wherein interest rates vary in relation to open market rates. It is usually below the inflation rate but above the interest rates on savings account. A floating interest rate allows owners to cash the annuity anytime which put pressure on the insurance companies to make their rates competitive to maintain their accounts.

Settlement Options of Purchase Annuities

Settlement of purchase annuities can be in lump sum, installment payments, income for life payments and interest only payments.

Lump Sum Settlement

Annuity contract is terminated when you opt for lump sum settlement. Both the principal amount and the accumulated interest are given to you. You will be taxed on all the interest the annuity earned over the life of the annuity contract.

Installment Payments

You will receive the annuity principal and its accumulated interest in annual instalments over the number of years you prefer. The balance in the annuity contract will still earn interest until the full amount is exhausted. The interest is partly taxed each year of instalment payment.

Income for Life Settlement

Income for life settlement is the traditional annuity settlement wherein a fix amount is paid to you each year in your lifetime. The insurance company designed the amount that you will receive each year by computing for your expected life span.

Interest-only Payment

The interest earned is paid to you annually. The principal is retained to earn more interest. The amount of payment is taxed fully which means that the amount you will receive is smaller compared to the other form of settlement payments.

You can also combine two of the settlement options to receive payments on your purchase annuities. The common settlements combined are the lump sum and installment payments. Whatever settlement you choose make sure that it will meet your cash flow requirements.


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