premiums and considerations

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PostPosted: Wed May 20, 2009 1:28 am   Post subject: premiums and considerations  

What's the difference between a "premium" (life insurance premium) and a "consideration" (annuity consideration). Aren't they the same thing?

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PostPosted: Wed May 20, 2009 9:35 am   Post subject:   

I think that the difference lies in the way both the products work.



Annuity doesn't promise you any coverage at the event of your sad death. It'd be simply insuring a stream of income at the time of your retirement. You either with the one time payment or periodic payments would be building a fund to receive monthly allowances after retirement.



Life insurance, on the contrary, would promise a lump-sum amount of coverage against the premium paid by you.



And, yeah, no death benefits are available with the annuity plans.



Thanks,

Rupert

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PostPosted: Wed May 20, 2009 10:20 am   Post subject:   

Rupert, annuities often have a death benefit.

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PostPosted: Thu May 21, 2009 2:08 am   Post subject: insurance  

Life Insurance VS. Annunity: seems like the best choice is Life Insurance. I know a few people who DO have Annunities. If Life Insurance is BETTER 'coverage', then why pick the other ( just thinking outloud, I guess).

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PostPosted: Thu May 21, 2009 4:07 am   Post subject:   

Because Life insurance and Annuities are two different things.



One is too cover an untimely death. (aren't they all pretty untimely?)

The other is to help cover a long life. (You don't want to outlive your money)



That's actually a little too simple when it comes to annuities though. They can be used for several things, but safety of money is one of the greatest motivators for annuities.



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PostPosted: Thu May 21, 2009 5:41 am   Post subject:   

Great answers in this post. I knew I liked this place.



If you want to get technical (don't I always?), a "premium" is actually part of the policyowner's "consideration." Sounds weird, huh?



The "consideration" is one of the elements of a valid, legal and enforceable contract. It's an exchange- each party to the contract must give something of value to the other party; money, a promise, property, etc. In an insurance contract, the insured's consideration is making statement on an application for insurance and the payment of premium and in "exchange" for that the insurance company give the insured a promise to pay the benefits cited in the contract of insurance (insuring agreement).



So, simply...you give them money (premium) and an application, and if they issue the policy they give you the promise to pay for a covered loss. So, while premium and consideration aren't exactly the same thing, they go hand in hand. It's commonly the language used in the different contracts. Annuity language has always been different than insurance language. Here the terms basically mean the same thing.



As far as life insurance paying in a lump sum, many insurers offer methods of annuitizing the death benefit, similar to annuity payouts.



As far as annuities and death benefits: Most deferred annuities are required to provide a death benefit if the annuitant dies during the accumulation period before the annuitization period begins. The death benefit is commonly 100% of the accumulated sum, but many companies will deduct loads from this death benefit. It's not a life insurance death benefit, it's just a return of some or all of the money in the annuity to the designated beneficiary.



There ya be. Always here to bore you.



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PostPosted: Thu May 21, 2009 6:40 am   Post subject:   

Thanks for the great answers...same meaning different language



That makes it easy to understand

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PostPosted: Thu May 21, 2009 9:35 am   Post subject:   

Quote:
Rupert, annuities often have a death benefit.




Yeah, but the purpose of annuity isn't same as that of life insurance. You don't buy annuity to cover the expenses associated with your untimely death.



Death benefit offer by the annuity plans are an added benefit. May be to attract more people towards it.



Thanks,

Rupert
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PostPosted: Thu May 21, 2009 9:50 am   Post subject:   

Hey guys, as far I know the income received from the annuity fund is taxable. Do they also impose tax on the death benefit received from the annuity plan?


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PostPosted: Thu May 21, 2009 12:18 pm   Post subject:   

Quote:
Hey guys, as far I know the income received from the annuity fund is taxable. Do they also impose tax on the death benefit received from the annuity plan?






It's the realized gain that is taxable. If the death benefit causes there to be a gain, it will be taxable, but that usually won't be the case. If a death benefit is paid, there usually isn't a gain. Let me give you an example of a typical death benefit on a deferred variable annuity:



The death benefit is the greater of the contract value or the premiums paid. Ex. Joe invests $100,000. The contract value drops to $50,000. Joe dies. His beneficiaries get $100,000. This will be tax free (assuming a non-qualified contract) since there is no gain.
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PostPosted: Fri May 22, 2009 6:23 am   Post subject:   

Quote:
Hey guys, as far I know the income received from the annuity fund is taxable. Do they also impose tax on the death benefit received from the annuity plan?




When an annuity starts paying the income stream, only part of the annuity payments are taxable. Each payment the annuitant receives will be part return of premium and part interest or gain, depending on the type of contract. The annuitant is taxed only on the gain portion.



As far as taxation on the death benefit is concerned, Insurance Expert nailed it:



Quote:
It's the realized gain that is taxable. If the death benefit causes there to be a gain, it will be taxable,




On the other hand, I've seen plenty of fixed annuities that will pay "100% of the accumulated value to the designated beneficiary if the annuitant dies during the accumulation period." In that case, the beneficiary would receive all of the money in the annuity and as Expert said, would be taxed on the gain.



Don't forget the tax hit on the dead annuitant's estate. The estate of the (dead) annuitant would be grossed up by an amount equal to the death benefit received by the beneficiary. Time for some estate planning!



Now on this comment by Rupert:



Quote:
Yeah, but the purpose of annuity isn't same as that of life insurance. You don't buy annuity to cover the expenses associated with your untimely death.




You're absolutely right, without question. Life insurance is intended (primarily) to take care of premature death, and annuities are intended to prevent one from outstripping their resources and having nothing to live on.



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PostPosted: Fri May 22, 2009 4:20 pm   Post subject: insurance  

SO.........the Annunity you would purchase just like a Life Insurance policy? Or.......after the "untimely" death of someone? I guess I'm getting a bot confused. I know Life Insurance you can have a monthly premium. Is it the same with Annunity?

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PostPosted: Sat May 23, 2009 1:00 am   Post subject:   

An annuity can be purchased anytime somebody has money.

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PostPosted: Sat May 23, 2009 4:15 am   Post subject:   

Quote:
Or.......after the "untimely" death of someone?




Why would someone need annuity after death?



Okay, annuities are bought to continue earning even after the pay checks stop coming i.e. continuing income after retirement. Lemme put an example,



Suppose, you earn $X in a month and want to continue with the same lifestyle that you have now even after your retirement. Therefore, you would be needing the same $X (we aren't considering rate of inflation here) coming to you every month. An annuity would assure you that amount.



You can either buy an annuity plan with lump sum payment and start receiving annuity income immediately, or can pay regular premiums and receive the benefits sometime in the future.



Now, why we need life insurance ?



We all know the reason, right?
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PostPosted: Wed May 27, 2009 4:48 am   Post subject:   

Quote:
SO.........the Annunity you would purchase just like a Life Insurance policy? Or.......after the "untimely" death of someone? I guess I'm getting a bot confused. I know Life Insurance you can have a monthly premium. Is it the same with Annunity?




NOW I see where you're coming from. Let's see if this helps clear up any confusion.



When you buy an annuity, you pay premium(s) just like you do when you buy a life insurance policy. The premiums are very similar in nature but with a different goal in mind. We'll get to that in a minute. Both have single-premium premium options, and annuities also have "flexible" and "installment" premium varieties. Flexible premium annuities have premiums that vary in terms of timing and amount, installment premiums are similar to monthly payment requirements, and single premiums are just that.



The idea of an annuity is to create an "estate" through the payment of premiums while alive to an annuity contract. The premiums will gain tax-deferred interest/gain while held in the account, with the idea of "liquidating" the estate through a series of periodic payments to the annuitant at a later date. It's nothing more than a self-funded retirement plan, similar in nature to a 401(k), SEP, Keogh, etc. It has "59 1/2 rules" and all that stuff.



Through the payment of premiums while alive and funding the annuity contract, the annuitant can structure the payments later in life to provide income that he cannot outlive.



Life insurance is meant to create an immediate estate upon death and serves many additional purposes- to pay off debt, take care of the kids, fund any number of things, taxes, funerals, medical bills, business continuation, qualified retirement plans and on and on. The main difference is this: life insurance is meant to take care of things when you die and annuities are intended to take care of you when you're alive.



While annuities have a death benefit depending on when the annuitant dies, don't confuse this death benefit with having anything to do with life insurance. Ain't the same thing.



Did this help at all? It's late and I might be babbling.



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