31 August 2006
Immediate Annuity
Posted by selfprofit under: Annuity .
The term annuity in financial theory is most closely related to what is today called an immediate annuity. This is an insurance policy which in exchange for a sum of money, makes a series of pay off. These payments may be either level or increasing periodic payments for a fixed term of years or until the ending of a life or two lives, or even whichever is longer.
The overarching characteristic of the immediate annuity is that it is a vehicle for distributing savings with a tax deferred growth factor. A common use for an immediate annuity might be to provide a pension income. In the US, the tax treatment of an immediate annuity is that every payment is a combination of a return of principal (not taxed) and income (taxed at normal income rates, not capital gain rates.) When a deferred annuity is annuitized, it works like an immediate annuity from that point on, but with a lower cost basis and more of the payment is taxed.