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Fixed Period Annuities
An annuity is a contract purchased with a sum of money to provide the buyer or annuitant with regular payments in return. Annuities work like loans in reverse, in that an individual purchases the annuity for a sum of money (the purchase price) and in return receives annuity payments, which contain interest, over time.
In return, the company pays back the sum of money over a period of time plus some interest. Typically taxes are deferred on annuities until the payments are made to the annuitant.
How Fixed Period Annuities Work
Annuities can vary in amounts paid, frequency of payments, and time periods over which the payments are made. Under some circumstances an individual annuitant can decide either how much is paid in each payment or the period of time over which payments are made. Since the total sum of money is usually decided upon by the amount paid into an annuity, a shorter fixed period annuity would typically have larger payments to the annuitant than a longer fixed period annuity.
If the individual decides on how much is paid to him or her with each payment than larger sums would usually mean a shorter period of payment and a choice of smaller sums would occur over a longer period of time. Some annuities can pay out over the lifetime of the individual.
Fixed period annuities are annuities where the individual annuitant or owner/purchaser of the annuity chooses the amount of time over which the annuity is paid back. Fixed annuities pay a fixed amount over a fixed period of time chosen by the annuitant. The amount of time is usually a function of many years such as ten or fifteen years during which annual, bi-annual, or monthly payments are made to the annuitant. Fixed period annuities are typically sold in the following categories:
- 5-year fixed period annuity – level payments are made over a period of five years
- 10-year fixed period annuity – level payments are made over a period of ten years
- 15-year fixed period annuity – level payments are made over a period of fifteen years
- 20-year fixed period annuity – level payments are made over a period of twenty years
Fixed period annuities are usually chosen to cover a period of time during which no other benefits or income is earned. For example, a retiree may choose to purchase an annuity that would pay back over a period of time after regular income has ceased but retirement benefits or other benefits have not yet begun. If the annuitant dies before the annuity has finished paying out, the remaining annuity can be transferred to a beneficiary.
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