Learning Annuity 101 Basics
Part of annuity 101 is understanding that annuities are investment vehicles that are sold primarily by insurance companies. Annuities play a very important role in structured settlements, retirement planning, and more. They enable you to save money and taxes while eliminating the fear that you will outlive your savings. Basically, an annuity is an investment contract or settlement policy that is between you and an insurance company.
You should know when learning annuity 101, that every annuity has two basic properties - whether the investment type is fixed or variable, and whether the payout is immediate or deferred. An annuity with immediate payout will begin payments to the recipient immediately, whereas the deferred payout means that they will receive payments at a later date. An annuity with a fixed investment type offers a guaranteed return on investment by investing in government bonds and other low-risk securities. Based on these two possibilities there are four possible combinations, but the ones most commonly seen in practice are annuities with immediate payout and fixed investments, and annuities with deferred payouts and variable investments.
More on Annuities
Another large part of understanding annuity 101 is knowing that there are many kinds of annuities - some are tailored for income, some for future growth, and some as savings tools that are dependent on your income and needs. Typically, when you are talking structured settlements, you are talking about fixed, tax-deferred or no-tax annuities. This is where the insurance company is given a lump sum of money, and it grows on a tax-deferred or no-tax basis. These annuities can be great because you don't pay any taxes on the earnings or profits that are built up in the annuity until the money is taken out or in a structured settlement situation, not at all.
The Tax Advantage Intended by Congress
Through the Internal Revenue Code, congress intended to subsidize victims by excluding from gross income the amount of damages (except for punitive) in a case involving personal injury or physical sickness, codified at 26 U.S.C. §§ 104(a)(2), as an incentive for that individual or his or her guardian to elect guaranteed future periodic payments rather than a lump sum, which could be dissipated rapidly, causing the injury victim ultimately to become a ward of society. A structured settlement annuity is certainly a special gift from congress to injury victims, not to insurance companies.
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