Individuals who come to CrowFly for help are generally looking to sell future payments promised to them through an annuity purchased from a highly-rated insurance company. And investors who come to CrowFly are often comparing the potential yields of purchasing these payments with annuities, bonds, and other fixed-income assets.
So, what is an annuity?
|A note for sellers of structured settlement payment rights. If you have an annuity granted in the course of a settlement it is very likely to be a Single Premium Immediate Annuity (SPIA), either as a specifically defined term or life plus period certain. Most of the rest of this article is not critical for you to explore. Better to start here.|
The dictionary definition of "Annuity", from Merriam Webster, is: “a sum of money payable yearly or at other regular intervals”
At their core, Annuities are all contracts providing for the payment of specific amounts of money in the future. A consumer deposits a specific amount of money with an insurance company (the price of the annuity). The insurance company then invests that money in safe, predictable investments like bonds that will support specifically defined payments back to the consumer, while providing enough excess earnings for processing overhead and profit (as an incentive for the insurance company).
But over the years, insurance companies have been expanding consumer options to address a broad range of needs. This article cannot possibly address all of the contract options available in the marketplace today. But we can give you some highlights and help you understand the range and terminology as you explore other resources.
|A note for buyers of structured settlement payment rights. CrowFly does not sell insurance products and should not be relied on for advice regarding tax implications of any products. This information is provided based on publicly available information to familiarize you with some of the appropriate terms. For more on purchasing structured settlement payment rights.|
First, you are going to hear a large number of acronyms – lots of “letter soup”. Here are a few of the key ones you will find:
- SPIA – Single Premium Immediate Annuity. This is one of the simplest annuity structures. Pay once now, and the insurance company starts paying you a set amount right away based on the options you select. Single-Premium means you only pay them money once. Immediate means they start paying out right now rather than waiting for funds to grow.
- DIA – Deferred Income Annuity. This is a cousin of the SPIA, pay now and set a time in the future to begin receiving specific payment amounts. As some have said, this is like a deferred pension plan that allows invested funds to grow tax-deferred. The deferral period can be very long or very short, and you often have the right to put more money into the annuity in defined ways during the accumulation period (before it starts paying you back).
- EIA/FIA – Equity Indexed Annuity or Fixed Indexed Annuity. This is a product that allows you to participate in market upside rather than setting a specific yield rate. There are many options for these, all of which are linked in some way to market performance to determine payments. The most common variety has protections when the market falls, but in exchange only pays you part of any market gains.
- MYGA – Multi-year Guaranteed Annuity. This is a DIA (see above) with specific return rates guaranteed for a specific number of years. Sometimes these are referred to as Fixed Annuities. These products are often compared with bank CDs, but with deferred earnings for tax purposes, and often include an option to annualize (spread out) payments at the end of the term. MYGAs generally come with the caveat that higher returns also mean some amount of principal risk.
- QLAC – Qualified Longevity Annuity Contract. This is a form of DIA but pushes the payout phase past 70.5 years old using IRA funds. This avoids contribution limits and is exempt from required minimum distributions.
With that said, here are some key terms to be aware of when considering annuities:
- Immediate vs Deferred – This just means whether you start receiving payments immediately, or whether you allow the money to grow tax-deferred before beginning to take payments. Deferring generally allows for larger payment sizes later on, as long as you don’t need the payments in the near-term to get by.
- Life vs Term/period – Annuities can be set up to pay you until your death. In these cases, you are betting that you will live longer than the insurance company expects. The insurance company is betting that on average, policyholders don’t live as long. You can alternatively choose to have payments only for a set number of years – a period (or term). Additionally, you can choose life with a period certain, meaning that you are guaranteed to receive payments for a specific period of time and then the remaining payments are paid out only as long as you survive. This locks in a minimum payout for you or your beneficiaries.
- Fixed, Indexed, Variable – Investor.gov has a great page that breaks these down. Essentially, Fixed annuities have defined contractual returns; this is what most people think of when they hear annuity – specifically defined payments in the future. Indexed annuities allow you to benefit from market gains while having defined protection if those markets fall. These annuities are still considered defined payments and are regulated as insurance products like most annuities. Variable Annuities allow you to direct your annuity payments to different investment options, usually mutual funds, which turns the contract into an investment in various markets and may change some of the regulatory and tax treatment. Variable annuities are intended to let investors participate in the stock market and still enjoy some of the tax-deferred and other benefits of annuities.
- Qualified vs Non-qualified – The simple version is that qualified annuities are funded by pre-tax dollars while non-qualified annuities are funded with after-tax dollars. Any withdrawal from a qualified annuity is taxed at your income tax rate. Withdrawals from non-qualified annuities are taxed only on the profit - the amount that is not a “return of principle”; this avoids double taxation of funds that were previously taxed.
Hopefully, this is helpful in understanding some of the complexities available in annuities today. There are many more terms to be aware of: surrender charge, death benefit, mortality and expense risk charge, GMIB (Guaranteed Minimum Income Benefit), accumulation period, joint life, and more. So, please consult a licensed professional when you are looking to purchase one of these products.
If you are considering investments in fixed income vehicles, please consider purchasing structured settlement payment rights through CrowFly opportunities.
More on that process and outcomes can be found here: https://crowfly.com/buyers