Insurance Annuity Tax

[ab-so-lut]

Are insurance annuity's taxed as normal income?

[ObiWan]

Originally Posted by ab-so-lut

Are insurance annuity's taxed as normal income?

An annuity is a distinctive financial product. Although it's not an insurance policy per se, it is a contract with an insurance company. Many different types of annuities exist, with many different features. A deferred annuity is a savings vehicle that accumulates earnings on a tax-deferred basis. An immediate annuity is a financial instrument that converts a lump-sum premium into a stream of payments over a certain period of time or for as long as the annuitant lives.

It works like this: You (the annuitant) pay cash to an annuity issuer (the insurance company) for either a deferred or an immediate annuity, which will accumulate earnings at a fixed interest rate (a fixed annuity) or a variable rate determined by the growth (or losses) in investment options known as sub-accounts (a variable annuity).

With a deferred annuity, you (or the beneficiary you chose) can receive the principal and earnings in one lump sum when the contract is surrendered (cashed in). With an immediate annuity, you (or your beneficiary) receive the principal and earnings over a predetermined period of time.

An annuity may have certain guaranteed or insurance-like characteristics. (Guarantees are based on the claims-paying ability of the issuing insurance company.) For example, a deferred variable annuity may guarantee that your beneficiary will receive at least the amount of your original principal if you die, even if the value of the annuity has declined due to poor performance of the sub-accounts you selected.

Whether you purchase a fixed or variable immediate annuity, or if you've chosen to "flip the switch" and start taking income from a deferred annuity, you're guaranteed to receive payments for life if you elected that payout option, no matter how long you live.

Deferred annuities are most commonly used to help save for retirement. Immediate annuities are generally used to provide a guaranteed income during retirement.

[ab-so-lut]

So insurance annuity's are taxed as normal income, but are deferred. Thanks.