

An annuity is a contract between a purchaser and an insurance company in which the purchaser agrees to make a lump sum payment or series of payments in return for regular disbursements, beginning either immediately (within 12 months) or at some future date. The goal of most annuities is to provide a steady stream of income during retirement for a specified period of time or for the remainder of one or more lives. The lives on which payments depend are called annuitants. The purchaser is often the annuitant and the person to whom periodic payments are made.
There are two basic kinds of annuity contracts: immediate and deferred.
The most common Immediate Annuity Contract payment options include:
Important Immediate Annuity Features
Factors to Consider when Purchasing an Immediate Annuity Contract
Income payments under the life contingent immediate annuity income option are based upon your age, gender, mortality table used by the insurer and premium paid to the insurer. For some options, your health and marital status may be considered.
A straight life annuity will provide a higher monthly income payment for a given premium than life contingent annuity with a period certain or refund feature. In other words, the cost of a specified income payment (e.g., $100 per month) will be higher for a life contingent annuity with a period certain or refund feature than for a straight life annuity. However, since payments cease upon the annuitant’s death with a straight life annuity, the annuitant assumes the risk that only a small percentage of the premium paid will be received in periodic payments if the annuitant dies shortly after the purchase (or earlier than his or her life expectancy).
If an immediate annuity is purchased, the income option selected should be appropriate under the circumstances. For example, a person with a dependent spouse may want to consider a joint and survivor annuity.
A person concerned with receiving a minimum return on his or her annuity premium may want to consider a life contingent option with a period certain or a refund feature.
A variable immediate annuity is often chosen to keep pace with inflation during your retirement years. However, such option exposes the annuitant to additional investment risk because income payments can decline in a falling market.
In deferred annuity contracts, the periodic income payments are deferred for a period of at least 12 months.
The periodic income payment amount is determined when the contract is purchased or a premium is paid in the case of a paid-up deferred annuity or at commencement of such payments (upon annuitization) based upon the amount of funds accumulated under the contract in the case of an accumulation annuity.
The amount of the income payment depends on the premium paid for the paid-up deferred annuity and on the accumulation account for an accumulation annuity and on the annuity income option chosen.
Paid-up Deferred Annuity
A paid-up deferred annuity, also commonly referred to as a deferred income annuity (DIA), is an annuity contract in which each premium payment purchases a fixed dollar income benefit that commences on a specified date, such as a person’s retirement date. The contracts do not maintain an account value. The premium cost for this product is much less than for an immediate annuity and it allows a person to retain control over most of his or her other assets during retirement, while securing longevity protection.
In the past, employers used this contract to fund employee retirement benefits. Each premium payment purchased a stream of income. At an employee’s retirement, the income streams were added together. The employer could maximize the employee’s retirement benefit if the contract did not provide for a death benefit or cash surrender benefit. Today, insurers are marketing a similar product, often referred to as longevity insurance. The contracts are generally purchased at retirement (age 65) and income payments are not scheduled to commence for a specified time period, such as 20 years (at age 85). The contracts generally do not provide cash surrender benefits and may not provide a death benefit.
For an annuity used to fund your IRA, SEP IRA, SIMPLE IRA, or retirement plan account, the Internal Revenue Code generally requires you to take required minimum distributions when you reach age 73 (the age will increase to 74 in 2029 and 75 starting in 2033). However, the Internal Revenue Service allows the purchase of Qualified Longevity Annuity Contracts (QLACs) in connection with these accounts. A QLAC permits a retiree to defer the minimum distribution start date to age 85. QLACs are generally paid-up deferred annuities that are tailored to meet IRS requirements which include premium limitations, possible return of premium death benefits, and possible surviving spouse benefits.
Accumulation Annuity
An accumulation annuity is a deferred annuity contract in which premiums paid (less expenses) are accumulated in an account (during the contract’s accumulation phase) and the accumulation amount is applied to purchase an annuity income option at a selected retirement age (during the payout phase). The most significant features of accumulation annuities include the following:
Annuity income options listed for immediate annuities are generally also available under deferred annuity contracts.
With an accumulation annuity, the contract owner is said to annuitize his or her accumulation account. In other words, the owner converts the accumulation account into an income stream.
Compare the income payments available under the contract to comparable payment options under single premium immediate annuities available in the market offered by other insurers.
You can make periodic withdrawals from the account value in lieu of annuitizing. Many contracts permit withdrawals of up to 10% of the account value per year without applying surrender charges.
One advantage of taking periodic or systematic withdrawals instead of annuitizing, is that you still have access to your account value. You can make a partial withdrawal if you need additional funds. In addition, your account value continues to be maintained and credited with current interest or investment earnings.
Of course, by taking periodic or systematic withdrawals you run the risk of depleting your account value and outliving the contract’s accumulated funds.
Types of Accumulation Annuities
There are five basic types of accumulation annuities offered by life insurers in New York:
Excess Interest Annuity. The excess interest annuity is the most common type of accumulation annuity. The contract guarantees a minimum interest rate for the life of the contract, but permits the insurer to declare discretionary excess interest. Such discretionary excess interest is generally determined and guaranteed annually in advance and is based upon present and anticipated earnings on current investments of the insurer. The periodic changes in excess interest permit insurers to offer rates that adjust in response to prevailing market rates.
Modified Guaranteed Annuity (MGA). A modified guaranteed annuity (MGA), also commonly referred to as a market value adjusted annuity (MVA), is an accumulation annuity that guarantees principal and a high rate of interest on amounts deposited for a specified time period up to ten years with an unqualified right to withdraw an unadjusted cash surrender benefit upon the expiration of the specified time period. Generally, the contract holder can select from a number of guarantee periods offered by the insurer (e.g., 3, 5, 7, 10 years). Withdrawals made prior to the expiration of the specified period may be subject to a market value adjustment and a withdrawal charge.
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 and Later |
7% |
6% |
5% |
4% |
3% |
2% |
1% |
0% |
Fixed Equity Indexed Annuity (EIA). A fixed equity indexed annuity is an accumulation annuity that credits excess interest in accordance with an external market index, such as the Standard & Poor’s 500 Composite Stock Price Index. EIAs provide their owners with the potential for larger interest credits based on growth in the equities market and provide a guaranteed minimum floor to avoid the downside risk that accompanies direct investment in equities.
Unlike excess interest annuities, the amount of excess interest to be credited is not known until the end of the year and there are usually no partial credits during the year. However, the method for determining the excess interest under an EIA is determined in advance.
For an EIA, it is important that you know the indexing features used to determine such excess interest. You should know whether:
You should also know that the minimum floor for an EIA differs from the minimum floor for an excess interest annuity. In an EIA, the floor is based upon an account value that may credit a lower minimum interest rate and may not credit excess interest annually. In addition, the maximum withdrawal/surrender charges for an EIA are set forth in the following table:
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Year 9 |
Year 10 |
Year 11 and Later |
10% |
10% |
10% |
9% |
8% |
7% |
6% |
5% |
4% |
3% |
0% |
Non-guaranteed Index Annuity. A non-guaranteed index annuity, also commonly referred to as a structured annuity, registered index linked annuity (RILA), buffer annuity or floor annuity, is an accumulation annuity in which the account value increases or decreases as determined by a formula based on an external index, such as the S&P 500. Like an equity indexed annuity (EIA), it provides their owners with the potential for larger interest credits based on growth in the equities market. However, unlike an EIA, the index return on a non-guaranteed index annuity may be negative and result in a loss of principal. In some instances, the potential investment loss may be significantly greater than the potential investment gain and it may be difficult to earn back losses. In addition, the maximum withdrawal/surrender charges for a non-guaranteed index annuity are similar to an EIA and are set forth in the following table:
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Year 9 |
Year 10 |
Year 11 and Later |
10% |
10% |
10% |
9% |
8% |
7% |
6% |
5% |
4% |
3% |
0% |
To learn more about non-guaranteed index annuities, see the Non-Guaranteed Index Annuity Q&A
Variable Annuity. A variable annuity contract can be defined as a contract in which amounts paid to the insurer are allocated to one or more separate accounts and in which the account value or annuity benefits payable under the contract vary with the investment performance of the assets allocated to the separate account.
Separate accounts typically are organized into separate portfolios called sub-accounts, each with its own investment objective (e.g., money market sub- account, bond or income-related sub-account or stock type sub-account). The allocation of the amounts paid into the contract is generally elected by the owner and may be changed by the owner, subject to any contractual transfer restrictions.
The following are important features of and considerations in purchasing variable annuities:
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 and Later |
8% |
8% |
7% |
6% |
5% |
4% |
3% |
0% |
Request a copy of the prospectus. Variable annuities can provide benefits that exceed the contract’s account value. Most variable annuities include a death benefit equal to the greater of the account value, the premium paid or the highest anniversary account value. Many variable annuity contracts offer guaranteed living benefits that provide a guaranteed minimum account, income or withdrawal benefit.
For variable annuities with such guaranteed benefits, consumers should be aware of the charges for such benefit guarantees as well as any limitation or restriction on investments options and transfer rights.
Bonus Annuities. Many accumulation annuities (both fixed and variable deferred annuities) provide for the crediting of a bonus rate (typically, 1%, 2%, 3%) on amounts deposited under the contracts for the first year. For fixed deferred annuities, the bonus rate is added to the interest rate declared for the first contract year.
Know how long the bonus rate will be credited, the interest rate to be credited after such bonus rate period and any additional charges attributable to such bonus, such as any higher surrender or mortality and expense charges, a longer surrender charge period, or if it is a variable annuity, it may have a bonus recapture charge upon death of the annuitant.
Replacement. Before replacing an existing insurance or annuity product, you should compare the two policies. In New York, agents are required to provide you with comparison forms to help you decide whether the replacement is in your best interest. Be aware of the consequences of replacement (new surrender charge and contestability period) and be sure that the new product suits your current needs. Be wary of replacing a deferred annuity that could be annuitized with an immediate annuity without comparing the annuity payments of both, and of replacing an existing contract solely to receive a bonus on another product.
Taxes. Annuity contracts provide certain tax advantages. Income taxes on interest and investment earnings in deferred annuities are deferred. However, in general, a partial withdrawal or surrender from an annuity before the owner reaches age 59 ½ is subject to a 10% tax penalty. Special care should be taken in roll-over situations to avoid a taxable event.
Annuity products have become increasingly complex. It is imperative that you understand the products available and the tax ramifications of these products. Consult a competent tax advisor for assistance.
Guaranty Fund. Generally, immediate and deferred annuity contracts issued to a New York resident by a licensed life insurance company that provide fixed benefit guarantees are covered by the Life Insurance Company Guaranty Corporation of New York for up to $500,000.
Such fixed benefit guarantees include the guaranteed minimum death benefit and guaranteed living benefits in variable annuity contracts.
Separate account investment options that limit guarantees to the contract holder's interests in assets allocated to the separate account are not covered by the guaranty fund. Generally, claims under a variable annuity contract would be satisfied out of such separate account assets.
Suitability/Best Interest. Make sure that the contract you select is appropriate for your circumstances. For example, if you purchase a tax qualified annuity, minimum distributions from the contract are required when you reach age 73. You should know the impact of minimum distribution withdrawals on the guarantees and benefits under the contract. Guaranteed living benefits in variable annuities often restrict withdrawals or limit or reduce benefits because of withdrawal activity. Only purchase annuity products that suit your needs and goals and that are appropriate for your financial and family circumstances.
Make sure that the agent or broker is licensed in good standing with the New York State Department of Financial Services. The Department of Financial Services has adopted rules requiring agents and brokers to act in your best interests when making recommendations to you related to the sale of life insurance and annuity products. The agent or broker may only consider your interests in making the recommendation. The agent or broker may not consider their own financial compensation or incentives when recommending that you purchase a particular insurance product. They must also disclose to you the reasons why the agent or broker believes that the particular product would help you meet your needs and goals. The rules were effective August 1, 2019 with respect to annuity contracts and February 1, 2020 with respect to life insurance policies.
Buy New York. Make sure that you are buying a New York approved annuity product. Be wary of an agent who suggests that you sign an application outside New York to purchase a non-New York product. Annuity products approved for sale in New York generally provide greater consumer protections than products sold elsewhere. The minimum account values are higher, charges are lower, and annuity payments and death benefits are more favorable.
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