1.   What is an annuity?

An annuity is a sum of money that is being paid out as a means to supply income where it cannot be attained through steady work.  This money is usually the result of either an investment, beneficiary payment, or legal settlement.  Beneficiary payments are often the result of an inheritance that was left to be paid in additional to a life insurance policy.  The legal settlement is one where a responsible party is legally bonded to pay a set sum of money to another.  This is usually the result of an accident where personal damages or losses occur.  Other annuities include those designed for retirement and lottery winnings.


2.   How is the annuity paid?

As the name implies, the money paid is broken down into annual payments.  These payments are then divided yet again into monthly or quarterly installments.  This is done to provide regular income to the beneficiary.  Payment is usually done via check from a financial company that manages the annuity payments.  These checks can be in the form of direct deposit as well.  The amount of the payment is usually the dividend from the annuity that is paid out equally throughout the life of the annuity itself.


3.   Are annuity payments taxable?

Current tax laws state that any annuities paid as income are taxable.  The payment authority will give the beneficiary a 1099-R form to include in the taxes to be filed.  Since taxes are not collected upon disbursement of payments, they will need to be included when taxes are filed for the year.

401k Annuity Insurance Savings

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Finger face with a question by Tsahi Levent-Levi, on Flickr.  This work is licensed under a Creative Commons Attribution 3.0 Unported License.


4.   Are contributions to an annuity subject to taxes?

Unlike payments received, any contributions put towards an annuity are not considered income and are not taxed.  Doing so would result in an overpayment of taxes.


5.   As the recipient of an annuity how can I receive the total of the remaining annuity in one lump sum?

Some cancellation fees and administration costs may be imposed but you should receive a check with the remainder of your annuity providing that remainder is part of the principal paid into it.  Keep in mind that this counts as income and is directly taxable.  There are legal parameters involved with an annuity.  Seeking the assistance of a financial annuity company that can assist in receiving the remaining amount of your annuity is advised.


6.   How is a life insurance policy different from an annuity?

Life insurance polices are designed to be executed upon your death.  An annuity is designed to be claimed as a means for steady income upon retirement.


7.   What is the difference between an annuity and a 401k?

There are similarities between the two but the differences are also vast.  Generally speaking, a 401k is a bond that is backed by publicly traded stocks.  This makes the 401k potentially vulnerable to economic decline.  The positive recourse is that a 401k can be withdrawn for the amount of the principal investment.  Annuities are savings contracts that are often penalized if broken.  The benefit of an annuity is that they are not backed by the market but by the personal money directly invested.


8.   Is an annuity sound advice for investment?

The short answer is yes.  Saving annuities work much like high powered savings accounts.  They are risk and maintenance free.  Unlike other investment types, most annuities are not dependent on current economic market trends.  The compiled interest earned is a set amount that is upfront and unchanging.  This allows the investor to redeem the benefits of the annuity when they deem fit.  Penalties for early withdrawal on these types of annuities are minimal and allow for flexibility.


9.   Who should consider investing in an annuity?

This is up to the investor to decide.  Anyone who is wanting to build reliable income for retirement should consider investing in an annuity.  Those who have been granted a lump sum of money either through inheritance or lottery many want to consider an annuity as a form of steady income.


10.   What happens to my annuity payments should I die in duration of the payment?

This depends on the type of annuity and the legal arrangements made upon your death.  Generally speaking, annuities can be passed on to beneficiaries and payments will be made just as they were to you.  In most cases, beneficiaries are declared upon the establishment of the annuity and enforced using a last will and testament.


Arnel Ariate is the webmaster of Money Soldiers.

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