how a whole life annuity works
annuities can be structured to make payments for a fixed amount of time commonly 20 years or make payments for as long as the annuitant and their spouse is alive actuaries work with insurance companies to apply mathematical and statistical models to assess risk when determining policies and rates the accumulation period occurs as payments are being made by the buyer of the contract to the insurance company the annuitization phase occurs when the insurance company makes payments to the annuitant at the end of the term the value in the account would be turned into a stream of payments in what s called the annuitization phase special considerationsannuities 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 most variable annuities let you invest in a variety of assets mainly stock mutual funds 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strong returns from their fund s investments there are no irs contribution limits and any earnings are not taxed until withdrawn withdrawals of taxable amounts from an annuity are subject to ordinary income tax and if taken before age 59 may be subject to a 10 irs penalty 1agents or brokers selling annuities need to hold a state issued life insurance license and also a securities license in the case of variable annuities 2 these agents or brokers typically earn a commission based on the notional value of the annuity contract example of a whole life annuityassuming a 6 rate of return for all years a 100 000 lump sum investment over 20 years in a taxable account would be worth 222 508 at the end of the term a tax deferred variable annuity pre tax 0 25 annual annuity charge would be worth 305 053 at the term s end and a tax deferred variable annuity post tax assuming lump sum withdrawal 0 25 annual annuity charge would be worth 239 436 