Most annuities are non-qualified which means, they are funded with owners’ after-tax monies. A great advantage of a fixed annuity is that contributions grow tax-deferred resulting in higher accumulations in the contract. At some point, however, taxes must be paid on the gain portion of an annuity. Taxes are due and must be paid by the owner at the time of surrender or when any withdrawals are made. By the same token, when a beneficiary inherits an annuity, he or she must pay taxes on the gain portion as ordinary income.

Fixed annuities are among the safest types of investments, and the risk of loss is low. Fixed annuities are generally structured to minimize risk with conservative, fixed rate returns. Furthermore, many contracts offer a Principal Guarantee or Return of Premium rider, guaranteeing the owner an amount no less than the total premiums paid (minus any withdrawal, applicable premium taxes and processing fees) when the contract is surrendered.

To discourage individuals from withdrawing funds too early, insurance companies attach surrender periods to their annuity contracts. Surrender periods are typically run between 5 to 10 years or longer. Should the annuity owners withdraw money in excess of yearly allowable amount (usually 10%), during the surrender period, they will pay an early surrender penalty.

Annuities have two phases, an accumulation period and an income or payment phase. During the accumulation period, the premiums you contribute to your annuity grow tax-deferred. But if you begin withdrawing from your annuity, either during the accumulation period, or after you annuitize the contact and begin receiving income, you are required to pay taxes. If the annuity is non-qualified and funded with your after-tax dollars, only the interest portion is taxable. If it is a qualified annuity, all withdrawals or payments are taxed.

Annuities are generally funded with after-tax dollars, meaning only the interest earned is taxable. However, annuities are taxed on a last-in, first-out (LIFO) basis, which means the money that comes out initially is attributed to the earnings portion of your annuity. Therefore, all withdrawals to the extent that they have not exhausted the interest earnings will be taxed as ordinary income. Once the value of your annuity falls below the total premiums you have contributed to your account, additional withdrawals will not be taxed.

Unlike qualified plans such as IRA and 401(k) that are subject to contribution limits set by the Regulation, annuity limits are set by the offering insurance companies, often at high limits. As an example, you can contribute up to a maximum of $500,000 per annuitant to Vantis Life Freedom series annuities.

If the owner dies and the annuity has not been annuitized, the entire annuity value will be paid to a named beneficiary or to the owner’s estate if there is no beneficiary or the beneficiary is deceased.  If the annuitant dies after the annuity has been annuitized, the annuity money may be disbursed to a named beneficiary according to the payout option elected.