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Majority of I.I.I. Web Visitors Know Their Annuities

Poll Question Focused on Difference Between Immediate and Deferred Annuities; I.I.I. Web Site Provides Comprehensive Information on Financial Planning

NEW YORK, April 30, 2007 — People who want to supplement their current income while approaching or in retirement understand they should purchase an immediate annuity rather than a deferred annuity, according to an online poll by the Insurance Information Institute (I.I.I.). More than 75 percent of respondents to the poll knew to purchase an immediate annuity under those circumstances.

“The main reason for buying an immediate annuity is so that the buyer doesn’t outlive his or her income. Many people today are living much longer than they would have expected and with advances in medicine and better personal health habits, such as a healthier diet and regular exercise, they might live to even more advanced ages in the future. So making your income last a lifetime may be more challenging than ever,” said Dr. Steven Weisbart, an I.I.I. economist who closely tracks the life insurance and annuities industries.

“There are also tax advantages to immediate annuities because the buyer only pays taxes on the portion of the payments which are derived from investment income,” Dr. Weisbart added. “Moreover, the buyer of an immediate annuity need not pay taxes on the principal, that is the monies used initially to buy the annuity, because those funds have already been taxed.”

An annuity is a contract between an individual, known as an annuitant, and an insurer to provide income for the annuitant’s retirement. Immediate annuities are purchased primarily by those between the ages of 55 and 85, industry market research indicates. The annuitant can purchase an immediate annuity to provide income to another person, too, such as a family member or a friend.

“Immediate annuities allow an individual to convert a lump sum of money into an immediate source of income, with payments generally starting about a month after the immediate annuity is purchased,” said Dr. Weisbart.

The typical immediate annuity buyer finances the purchase by transferring funds from an existing savings or investment account, or reinvesting proceeds they may have received as the result of an inheritance, the sale of a business or an insurance settlement. Immediate annuities are also called “payout” annuities.

In contrast, deferred annuities, designed as a long-term investment enabling the annuitants to grow their assets and provide them with a steady income at some point in the future, are usually bought by those between the ages of 40 and 65, industry data shows.

“The main purpose of deferred annuities is to accumulate funds for ultimate payout in retirement,” Dr. Weisbart said.

Like immediate annuities, only the investment income derived from a deferred annuity is considered taxable income. Unlike immediate annuities, however, deferred annuities are aimed at individuals who do not want to draw down on the income, which can accumulate on a tax-deferred basis until they are almost 60 years of age. Should an annuitant with a deferred annuity withdraw income from the account before the age of 59 ½ , he or she must usually pay a 10 percent penalty to the Internal Revenue Service (IRS) on whatever amount of money was withdrawn, in addition to whatever other income tax is owed. This IRS penalty fee is comparable to that assessed against those who withdraw monies from an Individual Retirement Account (IRA) before the age of 59 ½.

Deferred annuities also pay a death benefit to an annuitant’s survivors, whereas an immediate annuity will only do so if the immediate annuity has a guaranteed-period option that has not expired at the annuitant’s death.

The decision about whether to purchase an immediate or deferred annuity depends in large part on what portion of the annuitant’s retirement income is going to be derived from the annuity. To determine how annuities might factor into your long-term financial goals, the I.I.I. has created free, downloadable software at http://www.myfinancialhouse.org .

The I.I.I. online poll at http://www.iii.org drew more than 200 respondents in late March 2007 and offered an insight into the level of interest in the topic.

The I.I.I. is a nonprofit, communications organization supported by the insurance industry.


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