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Flexible Premium Annuities
An annuity is purchased by an individual in order to secure a guaranteed income for later in life. Annuities can be considered loans in reverse in that an individual pays for an annuity contract and the company who holds the annuity pays back the sum of money plus interest over a specified period of time.
Payment for an annuity can occur all at once or can be purchased with small sums of money over a period of time. When an annuity is purchased with smaller sums of money over a period of time it is called a flexible premium annuity.
How Flexible Premium Annuities Work
Flexible premium annuities act much like a retirement account. There is no set amount that an individual must pay into the annuity each year, but there are minimums and maximums. The minimum amount paid into a flexible premium annuity each year depends on the company through with the annuity is purchased. Minimum payments can be as small as $50 each year or as large as a couple of hundred dollars.
Although there is no set amount an individual must pay into the annuity account each year, there is usually a maximum that is allowed. This maximum amount of money that can be paid into a flexible premium annuity depends on the company through which the annuity was purchased.
Almost all flexible premium annuities are deferred annuities. This means that although the individual is paying into the annuity over a period of time, the annuity payments from the annuity to the individual will not begin for many years. Some reasons why an individual may choose a flexible premium annuity are:
- Small payments can be easier to manage over a long period of time
- Flexibility in amount paid into the annuity each year
- Flexibility in time between payments
- The individual can decide to schedule payments or make payments on an unscheduled basis
Flexible premium annuities can also be tax-deferred and work much like retirement accounts such as IRAs or 401(k) plans. In some cases the flexible premium annuity payments into the account can be tax-deferred until payments are made from the annuity back to the annuitant. Like retirement accounts, there are penalties for withdrawing money from an annuity before the flexible premium annuity has matured according to the contract.
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