With continuing advances in medical technology, the average lifespan in Tennessee, as well as outside of Tennessee, has been increasing for more than a century. It’s now commonplace to see someone live well into their eighties and beyond, which means living more years in retirement. While living a long, healthy life is good, it brings the increased responsibility of making sure that we don’t outlive our assets. In other words, you want your retirement income to last as long as you do.
An annuity (a contract between an annuitant and an annuity company) is a unique long-term savings/retirement income product that will not only help to accumulate wealth, but also to maintain wealth once it’s acquired.
Annuities are classified into one of two categories: qualified or non-qualified. This classification does not refer to State of Tennessee taxation, but instead refers to IRS rules for taxation concerning the contributions made to an annuity as well as withdrawals from an annuity.
- QUALIFIED
Qualified annuities are part of a retirement savings plan, such as an Individual Retirement Account (IRA) or a Roth IRA, which are funded with pre-tax dollars (money that has been contributed before income taxes are applied). - NON-QUALIFIED
Non-qualified annuities are funded with post-tax dollars (money that has already been taxed) outside of a retirement plan, but still offer the benefit of tax-deferral.
Contribution limits and ability for tax-deferral are what makes this product unique when compared to other savings vehicles like 401(k)s, Certificates of Deposit (CDs), and Mutual Funds. While many investments are taxed each year, annuities are not taxable until the money is actually withdrawn for use. Also, unlike 401(k)s and conventional IRAs, there is no limit to the amount of money that can be invested in an annuity and the minimum withdrawal requirements for annuities are much more liberal than they are for most other products.
There are generally four types of annuities:
- Flexible Premium Deferred Annuity (FPDA)
- Single Premium Deferred Annuity (SPDA)
- Single Premium Immediate Annuity (SPIA)
- Equity-Indexed Annuity (EIA)
Flexible Premium Deferred Annuity (FPDA)
A flexible premium deferred annuity is designed to be funded with the flexibility of making contributions as frequently or infrequently as the annuitant desires. Also, all contributions made into a flexible premium deferred annuity will grow with interest until such time that the annuitant begins making withdrawals from it.
Single Premium Deferred Annuity (SPDA)
Just like a flexible premium deferred annuity, a single premium deferred annuity will grow with interest until such time that the annuitant begins making withdrawals from it. However, instead of being funded with a series of contributions, a SPDA is funded with a lump sum contribution, which often comes from rollovers, maturing Certificates of Deposit (CDs), or the sale of an appreciated asset.
Single Premium Immediate Annuity (SPIA)
A single premium immediate annuity is funded from a lump sum contribution like a SPDA is, but instead of deferring withdrawals to a later date, this type of annuity begins paying a monthly income immediately after the contribution is made.
There are four payout options available with a SPIA:
- LIFETIME INCOME
This option (which offers the highest monthly income) guarantees payment only while the annuitant is alive. Upon the annuitant’s death, payments will cease, even if there are surviving family members. - LIFETIME WITH PERIOD CERTAIN INCOME
This option guarantees payment throughout the annuitant’s lifetime, no matter how long that is. In addition, payment is guaranteed to the annuitant’s beneficiary for a certain period of time if the annuitant should die before the period certain has passed. For example, if an annuitant chooses this option with a 10-year period certain but dies after only three years, then the annuitant’s beneficiary would receive payment for the remaining seven years. However, if the annuitant dies after the period certain, then the beneficiary will receive no additional payments. - PERIOD CERTAIN INCOME
This option allows the annuitant to choose how long payments will be received. However, when the end of the period certain is reached all payments will end (regardless of whether the annuitant is still alive). - JOINT AND SURVIVOR INCOME
This option provides a lifetime income throughout the lives of two annuitants. Upon the death of one annuitant, the surviving annuitant will continue to receive a lifetime income. All payments cease upon the death of the second annuitant.
Equity-Indexed Annuity (EIA)
An equity-indexed annuity is a special type of contract between an annuitant and an annuity company. An EIA is different from other annuities because of the way it credits earned interest to the annuity's value. Other annuities only credit interest calculated at a rate set within the contract. EIAs credit interest using a formula based on changes in the index to which the annuity is linked, usually the S&P 500, which could allow for much greater returns. Like other types of annuities, an Equity-Indexed Annuity guarantees a minimum interest rate, even if the index rate is lower than the amount promised, which would explain why EIAs have become so popular, especially amongst those looking to accumulate wealth.
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Please note that this page provides only an overview of the different types of annuities available in Tennessee. The information displayed here is intended to help you request an annuity quote. Please refer to your annuity contract for more information.
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