This penalty applies whether the amount is taken as a loan or an outright withdrawal

For example, assume the initial guaranteed rate is 8 percent for a period of one year. The contract promises a 1 1/2 percent bailout provision. The contract also says that a surrender charge is made upon a premature withdrawal anytime within seven years from the purchase date.

After the initial one-year period of the contract, the company announces the next years interest rate will be 6 go to the website 1/2 percent. Since this rate dropped 1 1/2 percent from the initial rate, the customer is entitled to avoid any surrender charges if the contract is cashed in.

One of the main appeals of deferred annuities is the income tax advantage that is offered investors. Investors pay no taxes on the earnings during the accumulation period; taxes are deferred until the liquidation period. Once payouts to the annuitant begin, only a portion of each payment is taxed as income. The remaining portion, which is not subject to income taxes, is considered as a return of the money that the investor paid into the annuity during the accumulation period.

The portion of an annuitants income that is subject to taxes is determined through a calculation required by the U.S. Department of the Treasury. This complex calculation is based on the projection of the amount the annuitant will receive in annuity income if he or she lives to life expectancy. This total income is referred to as the expected return. Once an expected return is determined, the next step is to calculate the percentage of the amount that was invested in the contract. Once the percentage is calculated, it is used each year to determine how much of the annual annuity income should be considered return of capital and how much should be regarded as taxable income.

There are certain income tax penalties related to annuities. In particular, there is a 10 percent penalty which applies to lump sum withdrawals from annuities before age 59 1/2. (There is an exemption to this 10 percent penalty if the amount of withdrawals before age 59 1/2 is part of a series of approximately equal periodic payments over a lifetime. Also, exempt are such payments in the event of death or disability.)

These investments help form the basis for the guaranteed cash values of life insurance and conventional annuity contracts

An important exception exists in the case of business-owned annuities. If a business entity, such as a corporation, partnership, or trust, owns an annuity on an employees life, any interest earnings or annual gains in the contract are subject to current income taxes. Annuities that are part of qualified plans, such as pensions and similar employee benefit programs, are exempt from the ruling. Immediate annuities are also exempt. (In addition to employer pension plans, the exclusion of taxable earnings on annuities applies to IRAs and other tax-sheltered annuities sponsored by certain nonprofit corporate employers.)

Variable Annuities

Like the fixed annuity, the variable annuity is a contract between an individual and a life insurance company. With both types, the owner contributes premiums that, along with their earnings, are accumulated within the policy contract. At an agreed-upon time, the insurance company begins making payments to the annuitant. Payments are made over the individuals lifetime or for some other stipulated period.

The basic difference between fixed annuities and variable annuities is the way in which accumulated funds are invested and the resulting payout. With fixed annuities, the accumulated funds are combined with the insurance companys general investments. In general, insurance companies invest funds for their fixed products in long-term bonds and other non-speculative issues.

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