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What are the annuity funding options?

Two funding options

There are two ways you can fund an annuity: with a single premium payment or through a series of periodic premium payments. With a single premium payment, you make one lump-sum payment to the annuity issuer and then do not make any more payments. With a periodic payment plan, you make a series of payments to the annuity issuer over a period of time.

Single premium payment funding option usually used by people who have received large sum of money

Most people who purchase an annuity with a single premium payment are individuals who have received a large sum of money at one time. For example, it may be someone who has received life insurance proceeds, has sold a business, or has liquidated a retirement plan and would like to convert that lump-sum amount into an income stream.

Single premium annuity may be either an immediate or deferred annuity

A single premium annuity may be either an immediate or deferred annuity. A single premium immediate annuity (SPIA) is an annuity that immediately (usually within one year of the purchase) begins making payments to you after the purchase date. You might want to purchase this type of annuity if you have just sold your business and would like to receive income immediately. A second type of single premium annuity is a single premium deferred annuity (SPDA). With this type of annuity, you purchase the annuity with a lump-sum payment that then accumulates for a period of time before the payout begins. The time period before the payments to the purchaser begin might be as short as one year or as long as decades.

Single premium annuity may be a fixed annuity, variable annuity, or equity-indexed annuity

A single premium annuity may also be classified as a fixed annuity, a variable annuity, or an equity-indexed annuity. The issuer of a fixed annuity pays a fixed rate of interest on the money that is invested in the annuity. Then, once the payout period begins, the purchaser receives a series of fixed payments. The purchaser of a variable annuity receives a rate of return that varies depending on the performance of underlying investment accounts. The payments that the purchaser receives once annuitization begins may be fixed or may vary from one pay period to the next, depending on the type of payout selected. Finally, a single premium annuity may also be an equity-indexed annuity, which is a hybrid between a fixed and variable annuity.

Caution: Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk including the possibility of loss of principal. Variable annuities contain fees and charges including, but not limited to mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees and charges for optional benefits and riders. Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.
You can invest money through multiple payments with a flexible premium annuity

Unlike a single premium annuity in which only one lump-sum payment is made into the annuity, you can also purchase an annuity by making a series of periodic payments. For instance, you may want to purchase a flexible premium annuity if you are saving for your retirement in the future and would like to save a set (or variable) amount of money each year toward that goal.

Two ways to pay periodic premiums

There are two ways you can make the periodic payments. First, you can pay the premiums on a level-premium basis, meaning you invest a set amount each year (or month or some other time period) into the annuity. For instance, you may want to invest $1,000 a year in the annuity. A second way to pay the premiums is on a more flexible basis whereby you can invest money in the annuity as frequently (or infrequently) as you like and can invest as much or as little as you like. Under this method of purchasing an annuity, you may invest $1,000 the first year, $500 the second year, nothing the third year, and $2,000 the fourth year, for example.

Caution: Some flexible premium annuities have a limit on the minimum amount you can invest at one time (usually $100) and may have a maximum amount that can be invested ($1 million, for example).
Flexible premium annuity is a deferred annuity

By its nature, the type of annuity in which you make a series of payments is a deferred annuity. If elected, the annuitization phase (i.e., when you will begin receiving payments from the annuity) will not occur until some point in the future after you have stopped paying premiums into the annuity. This may be 1 year, 10 years, or 40 years in the future.

Flexible premium annuity may be a fixed annuity, a variable annuity, or an equity-indexed annuity

Like a single premium annuity, a flexible premium annuity may be a fixed, variable, or equity-indexed annuity.

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Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.