Split Annuities Explained
The split annuity is a combination of a deferred annuity and an immediate annuity. Split annuities are structured to provide immediate income (from the immediate annuities) after taxes, while paying out the original premium (before taxes). The income generated from the annuity is guaranteed and secured for the duration of the contract, while the income from the deferred annuities grow at current, tax deferred rates. The principal goal of this kind of annuity is to have the investor’s original payment or premium returned once all payouts from the immediate annuity have ceased. Thus, the regular incomes coupled with the principal retention are the two main benefits of investors who buy split annuities.
For example, an investor purchases a split annuity. First, he or she starts out with a premium payment of $100,000, applying the rule of 72. The rule of 72 dictates that 72 divided by the prevailing interest rate decides how long it will take for the payment to double*. Continuing the example, let’s say 6 percent is the return for the annuity, thus resulting in 12 years to return to the original $100,000 premium, after following the rule of 72.
The $100,000 is split between an immediate annuity and a deferred annuity. This means that $50,000 is placed in both annuities. The immediate annuity thus allows the investor to earn an income of $420 a month for 12 years, since it will take 12 years to get back to the original premium payment. The deferred annuity, on the other hand would mount up back to the $100,000 after 12 years of receive an annual rate of 6 percent.
The split annuity is flexible. Additional income streams may be generated from the deferred annuity. Partial withdrawals are also allowed with the deferred annuity, while growth from the rate eventually replaces the premium payment.
This kind of investment tool is perfect for retirement investors who desire to earn income and secure money for other future uses. Retirement investors ought to use excess funds in applying the split annuity investment option. Prospective investors ought to see this strategy as a long term strategy for them to generate additional income while retaining money for the future, specifically for his or her spouse, children, grand children and so forth.
The split annuity is also known to be very economical when it comes to tax. With the split annuity, the immediate annuities repay the set of money every month over the specified period of time, usually computed using the rule of 72. The deferred annuity is left to grow on a fixed rate, until it is fully restored to the original premium payment. Such a process can be restarted. The split annuity can also be utilized as a very good asset management tool, ensuring that fixed payments are met. For instance, with fixed mortgage payments, the income of the split annuity may be credited to the account that is automatically deducted for the monthly payment. The deferred annuity at the same time rebuilds the principal on the side.
*In most cases The Rule of 72 is not a guarantee as interest rates cannot always be predicted. This rule is simply a guideline that investors and advisors use to help determine how long it will take money to double given a certain interest rate.
Annuities are best suited for long term investors. Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax. Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time. Any guarantees on principal invested are based upon the claims paying ability of the underlying insurance company.