Revealing your earnings on an Immediate Annuity

Understanding the earnings your money generates for you in an immediate annuity helps your evaluate your investment. A single premium immediate fixed annuity (SPIFA) gives you a fixed monthly payment for the term of the annuity. That term may be a certain number of years or for the remainder of your life. The amount the insurance company will pay you depends on the amount of premium you pay and prevailing interest rates in addition to expenses and your life expectancy if it’s a lifetime payout. Companies will quote you their monthly payout to you but not the interest rate (interest rates on immediate annuities are typically 2%-4%). Nevertheless, since all earnings of the company are dependent on interest-based investments, higher prevailing rates will allow them to make higher monthly payments – and vice versa. Earnings and taxation of your investment What you earn is the excess of payouts over the premium you pay. Every payout is considered part earnings and part return of premium. The fraction of each payout that’s taxable is the ratio of the total excess payout to the premium. To illustrate let’s take a hypothetical example of the payout over a 10 year term certain to illustrate [...]

Read more...