An annuity is bought by an individual or an annuitant so that he or she can get guaranteed earnings from that annuity over a specific period of time. An annuity is considered as a loan in reverse with the annuity holder buying an annuity contract with an annuity company which then returns back the amount of money along with interest in certain amount over a specific period of time. Some of the annuities pay out over remaining of the lifetime of the annuity holder even if the principal amount of money has been already paid back to him or her.
An immediate annuity is a type of annuities that starts paying to the annuity holder immediately after the annuity is purchased. Usually, it means the first payment back to the annuity holder happens 30 days after purchasing of the annuity. An immediate annuity paid for with a larger sum of money is considered as a single premium immediate annuity.
Payment amount and the frequency of payment from a single premium immediate annuity normally depend on the amount of money paid into an annuity. If the amount of money is large, the payments got from a single premium immediate annuity will be larger than the payments made from a single premium immediate annuity bought with small amount of money. Moreover, if the annuity holder buys a single premium immediate annuity with lifetime payment and loses rights of withdrawing or refunding the premiums, then the annuity holder will be paid continuously from that annuity even after initial premium is repaid.
Examples on Funding Single-Premium Immediate Annuity
Below are few examples of funding:
- Sale of an estate or a house
- Sale of investments or mutual funds
- Proceeds form the life insurance
Examples of Tax-Deferred or Qualified Funding
If single premium immediate annuities are bought from tax-deferred retirement accounts, the annuities are then considered as qualified annuities. Annuities bought with tax-deferred or tax-exempted accounts have monies which are taxable while the annuity holder gets payments. Examples of tax-deferred or qualified funding for a single premium immediate annuity include:
- Employer Pension Fund or Simplified Employee Pension (SEP)
- 401 (k) plans
- 403 (b) plans
- Keogh plan
- Defined Contribution Plan or Defined Benefit Plan