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    Annuity Funding Options

    At their core, annuities are contracts between and individual and a life insurer in which a promise to protect principal, pay a guaranteed rate of return and/or pay a guaranteed income stream is made by the insurer in exchange for a sum of money.  The contract is not executed until it has been funded by the annuity contract owner. Depending on the circumstances there are a couple of different annuity funding options that can considered: Single premium, periodic or flexible premium. Additionally, charitably-minded people can use an asset-funding through a charitable gifting method.

    Single Premium Funding

    The most common form of annuity funding is with a single premium which means that the annuity is fully funded with one lump-sum deposit.  This method is used for funding immediate annuities which are contracts that promise the annuity owner a guaranteed stream of income payments over a specific period of time or for life.  Typically, the income begins at some time between 30 days and one year following the single premium deposit. With immediate annuities, the single premium payment  irrevocable once the income payments begin.

    Single premium funding is also used with deferred annuities which, as the name implies, defers the income payments into the future. Up to that point, the funds are allowed to accumulate in an account and taxes on earnings are also deferred until the funds are withdrawn or the income payments commence.  The tax deferral is a great advantage of deferred annuities, however, there may be a penalty for withdrawing the funds prior to age 59 ½. If, instead, the funds are paid out in equal payments for life, the penalty does not apply.

    Single premium annuities are commonly used in structured settlement cases in which the court awards a sum of money to a claimant that is to be paid out in a series of payments. The payments can be deferred as in the case of an award made to a child who has to wait until he reaches adulthood to begin receiving payments. The settlement can call for payment to be made over a certain period of time, or for the life of the claimant.  Lotteries also use single premium immediate annuities in those instances when the winner elects to receive the winnings in annual installments.


    Flexible Premium Funding

    Alternatively, deferred annuities can also be funded through periodic payments made in monthly installments or in flexible payments throughout the accumulation phase of the annuity.  At the end of the accumulation phase, at a time of the annuity owners choosing, the annuity can be converted to an immediate annuity for guaranteed income payments.  At anytime during the accumulation period, annuity funds are available for withdrawal (the same for single premium deferred annuities).  Most annuity contracts allow for withdrawals of up to 10% of the annuity value without any additional charge.  After a period of time, typically seven to 12 years, unlimited withdrawals can be made without charge.  But, there could be a 10% IRS penalty if the withdrawal occurs prior to age 59 ½.

    Charitable Funding

    Some people are in a position to donate a portion of their wealth to charity. In some circumstances a charitable donor can generate current tax advantages as well as future estate tax benefits in a properly structure charitable gift arrangement using an annuity.  The most commonly used arrangement is a charitable remainder annuity trust in which a donor irrevocable gifts asset to a trust with a charity as the beneficiary.  The trust them pays an income to the donor until his death at which time the trust assets become the property of the charity. The donor is allowed a current tax deduction for a pro-rata portion of the gifted assets, and, at his death, the asset is removed from his estate which will lower the potential estate tax.

    Variable Annuity Funding Options

    Variable annuities are different from fixed deferred annuities in that, once they are funded with a single premium or flexible premiums, the annuity owner must also fund the investment accounts inside the annuity.  Variable annuities usually include a choice of investment funding options including various stock accounts, a bond account, a fixed account and a money market account.  Funding these accounts consists of allocating the premium deposit among the various accounts in a way that reflects the annuity owner’s investment profile.  Should his investment profile change, the funds can be switched between the accounts.


    While it’s nice to have a number of funding options, it’s important to know your financial situation and your financial objectives well enough to focus in on the option that is most appropriate.  A single premium option may produce the best long term results, but, it may not be appropriate for someone with limited assets. And, certainly the funding options available for charitable gifting and variable annuities should be considered along with the guidance of a qualified financial professional.