Annuity Consideration

An annuity consideration is the money an individual pays to an insurance company in exchange for a financial instrument that provides a stream of payments for a given length of time. An annuity consideration may be made as a lump sum or as a series of gradual payments.

Also referred to as a premium.

The payments provided by the annuity can be distributed monthly, quarterly, semiannually, or annually. Payment amounts are based on a number of factors, including the amount of the annuity consideration, the age at which the annuitant begins receiving payments, the annuitant's life expectancy, the annuity's anticipated investment returns, and whether the annuity is fixed or variable.

Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits.

Annuities can be structured generally as either fixed or variable. Fixed annuities provide regular periodic payments to the annuitant. Variable annuities allow the owner to receive greater future cash flows if investments within the annuity fund do well and smaller payments if its investments do poorly. This provides for a less stable cash flow than a fixed annuity, but allows the annuitant to reap the benefits of strong returns from their fund's investments.

These instruments are not for everybody, especially those who may need access to their money. Fees during the surrender period can be high, more so in the early years of ownership. Meanwhile, you don't have access to the cash invested. These surrender periods can last anywhere from two to more than ten years, depending on the particular product. Surrender fees can start out at 10% or more though the penalty typically declines annually over the surrender period.

Some advisors argue that investors looking for a stream of payments can structure their own annuity-like instrument with a combination of dividend- paying stocks, bond ladders, and money markets. Among the advantages of this approach are low fees and ready access to your cash.