Death Benefit Annuity And Taxes
Annuities are long term saving vehicles used for retirement. They are complex financial instruments often difficult to understand. There are 4 common types of annuity -- immediate, deferred, fixed and variable. All have relative advantages and disadvantages.
An annuity is a financial contract in the form of an insurance product where the issuer, being the life insurance company or a financial institution, makes series of payments to the buyer in exchange for immediate payment in lump sum or in regular payments. Annuities can be either be joint survivor annuity, a living benefit annuity or a death benefit annuity.
The basic benefit that an annuity offers is a guarantee that upon death of the buyer, the insurance company will at least pay the amount paid by the buyer before his death. After investing in a variable annuity and the value of the investment goes down, the buyer can be assured that after his death the beneficiary will receive at least the original amount contributed.
Death benefit comes with riders that provide options like annual or monthly step ups that take a snap shot of the account value on a periodic basis. The highest value is recorded and used as a death benefit amount.
The buyer is not taxed on any interest, dividends or capital gains that accumulate inside the annuity contract until it is withdrawn. The gain is withdrawn first and all gain is taxed as ordinary income. Withdrawal of gains prior to becoming 59 years old may be subject to an additional 10 percent penalty tax. Most people do not receive many benefits from the tax deferral in annuities.
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