Stages of Annuities and what is important about them.
Accumulation Phase – Fixed Indexed Annuities
The majority of annuities purchased in the United States are Fixed Indexed Annuities, which begin in the accumulation phase upon deposit of funds, or savings period. During this time, a Fixed Indexed Annuity owner makes one deposit or multiple deposits (to maximize annuity bonuses) to increase the value of their assets for use in creating an income stream for uses in retirement.
If you make withdrawals during this time that exceed contract guidelines, usually more than 10% per year, you may be charged high surrender fees, income tax and a 10% federal penalty tax if you are under age 59½. There are also other contract options like nursing home waiver, or disability waivers that allow more than the stated contract withdrawal amount features.
It’s also worth noting that fixed indexed annuity owners seldom follow through with the whole contract term. Instead, they seem to treat their contracts like a normal savings account but with an insurance company and take withdrawals as needed or to withdrawal as a lump sum for use elsewhere.
Annuitization Phase – Immediate Annuities
During the annuitization phase, the contract value is transferred to the insurance company in exchange for a stream of payments. These payments last either for life or a set number of years with certain contract choices such as life, period certain, life with cash refund, life with installment refund.
There are three paths to annuitization: the first is by buying an immediate annuity, which begins in the annuitization phase and begins payments usually a month after the contract is accepted. The second is by converting your fixed indexed annuity into an immediate annuity to begin collecting regular payments under the contract guidelines. The third is to trigger an income rider that will start income payments based on your age, account value, distribution choices and in what contract year the option was triggered. There are different income rider options so please make sure you understand the benefits and costs.