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| SINGLE PREMIUM | |
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There are various ways to pay your premiums when you decide to purchase an annuity. One is called a single premium, and most fixed rate annuities require annuitants to pay using only one initial single premium. The reason is the fact that interest rates are constantly rising and falling. When you sign a contract for a single premium annuity, you will receive guaranteed payments for a specific time period after you pay a single lump sum. Most other types of annuities require you to make regular payments for a prolonged time period. Financial firms and insurance companies offer single premium annuities. Individuals of almost any age can purchase a single premium annuity. Here are some examples when you may want to consider this type of annuity: |
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The amount you will have to pay for your premium will vary, depending on the amount and the time period of your annuity contract. Normally, the higher the amount of premium you pay for a single premium annuity, the higher the payments you will receive. You can also decide to purchase a single premium annuity that will last for the rest of your life and terminate when you die. Another option is to purchase one that will only last for a set time period such as 10 or 20 years. If you are married, you may want to consider making both you and your spouse joint policyholders. That means that your spouse or children can be named beneficiaries and will receive the remainder of your annuity payments when they die. Yet another flexible option of single premium annuities is whether you wish to make varied or fixed payments. Some people decide to receive lower annuity payments when they are working full-time and then increase the amount of the payments as they near retirement and reduce their work hours. The main disadvantage of a single premium annuity is that you will have to pay high penalties called surrender charged if you decide to cash out early. You also have to remember that you will be taxed on your earnings as soon as you withdraw your money from your annuity account. |
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| LEVEL PREMIUM | |
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If you don’t have the money to make an initial lump sum premium payment, you should talk to your insurance provider about purchasing a level premium annuity. Just as its name implies, level premiums involve paying set or level periodic payments into your annuity account until your annuity income starts. This period of time is called the accumulation phase.
In most cases, the premium arrangement requires you to pay annually until your payments are scheduled to begin. However, some premiums may be paid semi-annually, quarterly or even monthly, depending on your specific annuity contract. |
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| Factors Used to Determine Your Level Premium Payments | |
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Most insurance companies use five factors to determine the amount of your level premium payments. The first if your sex and age, as insurance companies use actuary tables to estimate a person’s expected life span or how long they will be likely have to make income payments. However, certain states do not use sex as a factor when determining premiums. The assumed rate of interest is the next factor, and the fourth factor is the insurance company’s guarantee of payment concerning the overall amount or the total number of payments and the amount of the monthly or annual income. The longer the guaranteed payment and the higher the amount of periodic income payments, the higher the premium you will be charged. The fifth factor used to determine your level premium payments is an amount charged by the insurance company to offset some of their operating expenses. This dollar amount is referred to as a load. |
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| Advantages of a Level Premium Annuity | |
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Most people choose this option because they want to receive a specific amount of income by the time they are ready to retire. Basically, level premiums are a type of forced savings account, as you will be making regular deposits to your account and earning interest. Another advantage of a level premium annuity is that you won’t end up with any unwelcome surprises regarding how much you have to pay. You know exactly what your payments will be upfront. This makes it easier to budget and plan for your retirement. Level premium annuities are always deferred, since your payments will start at a future date. |
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| FLEXIBLE PREMIUM | |
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A flexible premium means that you can add more money to your annuity after you have paid the initial premium. The reason is that your investment is usually linked to mutual funds. You can vary how much you want to pay for each premium payment within a specified minimum and maximum outlined in your annuity contract. For example, you may be able to pay as low as $250 or as high as $10,000 annually. Just like a level premium annuity, you need to pay the premiums for a flexible premium annuity for a specified period of time before your annuity benefits will start. The amount of time will vary depending on your insurance company. However, another flexible element of this type of annuity that distinguishes it from other types is the fact that you can choose when to pay your payments, as they are not on a set schedule. The income you will receive depends on how well the investments linked to the annuity end up performing. Therefore, the value of your annuity may end up being higher or lower than the total premium you paid for the policy. Other factors that affect your total available income stream are the total amount of capital appreciation of the account and the total amount of premiums you have paid into it. However, certain insurance companies will agree to pay a death benefit that is at least the amount of the premium you have paid, even if the funds are lower when you die. Other insurance providers may agree to pay what is called a stepped-up death benefit. This means that if the fund was at a higher level previously but is lower when you die, the insurance company will pay the higher amount of the fund. If your annuity is being used to fund an IRA, flexible premium payments are a given. If you work at a job where you don’t receive a steady income, purchasing a flexible premium annuity can also be beneficial. You may not have enough money to pay scheduled set payments and you may find it too difficult to pay for your annuity with a lump sum payment. Fortunately, you can enjoy the convenience of being able to alter your premium payments to suit your lifestyle with a flexible premium annuity. |