Thursday, January 11, 2007

Annuities: Payment or Purchase options

There are three ways to buying an annuity. The first would be called single payment immediate. This means you give the insurance company a lump sum of money and within 30 days or so, you will begin receiving these payments for life. This is most suitable for someone who is near retirement or above age 59 1/2.

The second payment option is called Single Payment Deferred Annuity. That means you give a lump sum of money to the insurance company and the company will invest it for you until the time you choose to begin payout. During this time, your investments grow tax deferred. Most lottery winners choose these payment option. And many professional athletes that earns millions of dollars are given a single payment deferred annuity by their team or employers as a form of future compensation.

The third payment option is called Periodic Payment Deferred Annuity. This is most suited for someone who doesn't has a large sum of money. So, they will elect to put money in the annuity on a monthly, quarterly, or annual basis. Many variable annuities require a minimum balance of $5000 or more. If you don't have that kind of money, you can setup a periodic schedule of payments in which you can put in a minimum of around $250/month or so (depending on what the prospectus says).