Funding An Annuity: What Are The Options?

At the simplest level, annuities are funded when you makepayments (premiums) now in order to receive payments (return ofpremiums and any earnings) later. However, annuity payments madeprior to age 59? may be subject to a 10% federal tax penalty unlessan exception applies.

Some annuities are funded with one payment (single premiumannuities), and some are funded over time (flexible premiumannuities).

There are also some annuities that are not funded with cash atall.

These are charitable gift annuities, and they’re often fundedwith appreciated assets to gain special tax benefits.

Single premium annuity

As you might expect, with a single premium annuity, you (thepurchaser) pay one premium. If it is a deferred annuity, payoutsbegin at a later date, perhaps years in the future.

A single premium immediate annuity (immediate annuities are onlyfunded with a single payment) usually requires a distributionstarting date that is within one year of the annuitycontribution.

The single premium annuity is also used in othersituations.

When a defined benefit pension plan is terminated, the accruedbenefits under the plan are determined for each plan participant,and a single premium annuity may be purchased for each planparticipant (with benefits usually starting at age 65).

Another common use is in the structured settlement of lawsuits.In these cases, the parties agree to pay a sum of money not as alump sum, but as a series of payments (often for the life of aninjured party).

A monthly amount to be paid is agreed to by the parties, and anannuity is purchased that provides that amount.

Periodic annuity funding

Although deferred annuities can be funded with a single premium,mostly they are funded over a period of time. Periodic payments canbe made until the annuity payout period begins.

Annuities that utilize periodic funding can be divided into twocategories:

Level premium funding: Premium payments are made on a regular,ongoing basis. Payments can be made either monthly or annually,depending on the terms of the contract.

Flexible premium funding: Premium payments are flexible andcan occasionally be skipped. The insurer may impose an annualminimum and maximum on the amount of premiums that can be paidin.