Types Of Annuities And Basic Tax Rules

<div class="Section1">An annuity contract held by a trust or other entity as agent for a natural person is considered held by a natural person.<a href="#_ftn1" name="_ftnref1">¹</a> If a non-natural person is the nominal owner of an annuity contract but the beneficial owner is a natural person, the annuity contract will be treated as though held by a natural person.<a href="#_ftn2" name="_ftnref2">²</a> Also, an annuity owned by a grantor trust will be considered to be owned by the grantor of the trust.</div><br /> <div class="Section1"><br /> <br /> In a letter ruling, the IRS decided that a trust was considered to hold an annuity contract as an agent for a natural person where the trust owned an annuity contract which was to be distributed, prior to its annuity starting date, to the trust's beneficiary, a natural person.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> In another ruling, the IRS considered an irrevocable trust whose trustee purchased three single premium deferred annuities, naming the trust as owner and beneficiary of the contracts and a different trust beneficiary as the annuitant of each contract. The terms of the trust provided that the trustee would terminate the trust and distribute an annuity to each trust beneficiary after a certain period of time. The IRS held that the non-natural person rule was not applicable.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The IRS concluded that the non-natural person rule does not apply to a trust that had invested trust assets in a single premium deferred variable annuity where the same individual was the sole annuitant under the contract and the sole life beneficiary of the trust.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Where a trustee's duties were limited to purchasing an annuity as directed by an individual and holding legal title to the annuity for that individual's sole benefit and the trustee was not able to exercise any rights under the annuity contract unless directed to do so by the individual, the IRS concluded that the trustee was acting as an agent for a natural person.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Further, where the trustee of an irrevocable trust purchased an annuity and had the power to select an annuity settlement option or terminate the annuity contract, the annuity was still considered to be owned by a natural person.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> A charitable remainder unitrust, however, was not considered to hold an annuity contract as an agent for a natural person and, thus, was required to include income on any annuity contracts in ordinary income each year.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Although it is not entirely clear that all permissible beneficiaries of a trust named as owner of a deferred annuity must be natural persons, it is significant that, as of June 2010, all private letter rulings addressing whether a trust named as owner of a deferred annuity was acting as "the agent of a natural person" have specified that all beneficiaries were, in fact, natural persons.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> If all beneficiaries of a trust owning a deferred annuity must be natural persons, must the term "beneficiary" be taken literally? In the case of a "special needs" trust (such as an OBRA "D(4)(A)" trust), it is not clear whether the position of creditor occupied by the state Medicaid agency (to the extent of any Medicaid payments made to the trust beneficiary) will constitute the interest of a "beneficiary," where the state Medicare statute does not specify that the state's interest is that of a "beneficiary."<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 72(u)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     H.R. Conf. Rep. No. 99-841 (TRA '86) <em>reprinted in</em> 1986-3 CB Vol. 4 401.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Let. Rul. 9204014.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     Let. Rul. 199905015.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.     Let. Rul. 9752035.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.     Let. Rul. 9639057.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.     Let. Rul. 199933033.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.     Let. Rul. 9009047.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.     Let Ruls. 20049011, 20049013, 20049014, 20049015, 20049016, 200018046.<br /> <br /> </div>

<div class="Section1">Except as noted below, to the extent that contributions are made after February&nbsp;28, 1986, to a deferred annuity contract held by a corporation or another entity that is not a natural person, the contract is not treated for tax purposes as an annuity contract.<div class="Section1"><br /> <br /> When an annuity contract is no longer treated as an annuity for tax purposes, income on the contract is treated as ordinary income received or accrued by the owner during the taxable year.<a href="#_ftn1" name="_ftnref1">¹</a> &ldquo;Income on the contract&rdquo; is the excess of (1) the sum of the net surrender value of the contract at the end of the taxable year and any amounts distributed under the contract during the taxable year and any prior taxable year over (2) the sum of the net premiums (the amount of premiums paid under the contract reduced by any policyholder dividends) under the contract for the taxable year and prior taxable years and any amounts includable in gross income for prior taxable years under this requirement.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> This rule does not apply to any annuity contract that is:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; acquired by the estate of a decedent by reason of the death of the decedent;<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; held under a qualified pension, profit sharing, or stock bonus plan, as an IRC<br /> Section&nbsp;403(b) tax sheltered annuity, or under an individual retirement plan;<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; purchased by an employer upon the termination of a qualified pension, profit sharing, or stock bonus plan or tax sheltered annuity program and held by the employer until all amounts under the contract are distributed to the employee for whom the contract was purchased or to the employee&rsquo;s beneficiary;<br /> <br /> (4)&nbsp;&nbsp;&nbsp;&nbsp; an immediate annuity (i.e., an annuity that is purchased with a single premium or annuity consideration, the annuity starting date of which is no later than one year from the date of purchase, and that provides for a series of substantially equal periodic payments to be made no less frequently than annually during the annuity period); or<br /> <br /> (5)&nbsp;&nbsp;&nbsp;&nbsp; a qualified funding asset (as defined in IRC Section&nbsp;130(d) but without regard to whether there is a qualified assignment).<a href="#_ftn3" name="_ftnref3">³</a> A qualified funding asset is any annuity contract issued by a licensed insurance company that is purchased and held to fund periodic payments for damages, by suit or agreement, on account of personal physical injury or sickness.<a href="#_ftn4" name="_ftnref4">⁴</a></blockquote><br /> These requirements apply &ldquo;to contributions to annuity contracts after February&nbsp;28, 1986.&rdquo;<a href="#_ftn5" name="_ftnref5">⁵</a> It is clear that if all contributions to the contract are made after February&nbsp;28, 1986, the requirements apply to the contract. It seems clear enough that if no contributions are made after February&nbsp;28, 1986, to an annuity contract, such contract held by a non-natural person is treated for tax purposes as an annuity contract and is taxed under the annuity rules ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="512">512</a>). If contributions to a contract held by a non-natural person have been made both before March&nbsp;1, 1986, and after February&nbsp;28, 1986, however, it is not clear whether the income on the contract is allocated to different portions of the contract and whether the portion of the contract allocable to contributions before March&nbsp;1, 1986, may continue to be treated as an annuity contract for income tax purposes. The IRC makes no specific provision for separate treatment of contributions to the same contract made before March&nbsp;1, 1986, and those made after February&nbsp;28, 1986.<br /> <br /> For annuity contracts held by a non-natural person as agent for a natural person, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="514">514</a>.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 72(u).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 72(u)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 72(u)(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 130.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; TRA &rsquo;86 &sect; 1135(b.).<br /> <br /> </div></div><br />

<div class="Section1">The rules in IRC Section&nbsp;72 govern the income taxation of all amounts received under nonqualified annuity contracts. IRC Section&nbsp;72 also covers the tax treatment of policy dividends and forms of premium returns. Qualified annuity contracts are governed by the tax rules of the retirement account in which they are held.<div class="Section1"><br /> <br /> All &ldquo;amounts received&rdquo; under an annuity contract are either &ldquo;amounts received as an annuity&rdquo; or &ldquo;amounts not received as an annuity.&rdquo;<br /> <br /> &ldquo;Amounts received as an annuity&rdquo; (annuity payments) are taxed under the annuity rules in IRC Section&nbsp;72. These rules determine what portion of each payment is excludable from gross income as a return of the purchaser&rsquo;s investment and what portion is taxed as interest earned on the investment. They apply to life income and other types of installment payments received under both immediate annuity contracts, and deferred annuity contracts that have been annuitized ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="527">527</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="546">546</a>).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Payments consisting of interest only are not annuity payments and thus are not taxed as &ldquo;amounts received as an annuity.&rdquo; Periodic payments on a principal amount that will be returned intact on demand are interest payments.<a href="#_ftn2" name="_ftnref2">²</a> Such payments, and all amounts taxable under IRC Section&nbsp;72 other than regular annuity payments, are classed as &ldquo;amounts not received as an annuity.&rdquo; These include amounts actually received as policy dividends, lump sum cash settlements of cash surrender values, cash withdrawals and amounts received on partial surrender, death benefits under annuity contracts, a guaranteed refund under a refund life annuity settlement,<a href="#_ftn3" name="_ftnref3">³</a> and policy loans, as well as amounts received by imputation (annuity cash value pledged as collateral for a loan). &ldquo;Amounts not received as an annuity&rdquo; are taxable under general rules discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="515">515</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="523">523</a>. The taxation of distributions from life insurance policies is discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="10">10</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="13">13</a>.<br /> <br /> Except in the case of certain annuity contracts held by non-natural persons ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="513">513</a>), income credited on a deferred annuity contract is not currently includable in a taxpayer&rsquo;s income. There is no specific IRC section granting this &ldquo;tax deferral.&rdquo; Instead, it is granted by implication. The increase in cash value of an annuity contract, other than by application of dividends, is neither an &ldquo;amount received as an annuity&rdquo; nor an &ldquo;amount not received as an annuity.&rdquo; As a result, an increase in cash value is not a distribution and is not includable in the taxpayer&rsquo;s income, except where the IRC specifically provides otherwise ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="513">513</a>).<br /> <br /> IRC Section&nbsp;72 places a penalty on &ldquo;premature distributions&rdquo; ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="523">523</a>).<br /> <br /> Contracts issued after January&nbsp;18, 1985 have post-death distribution requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="593">593</a>). These post-death distribution requirements also apply to contributions made after January&nbsp;18, 1985, to contracts that were issued before that date. Contracts issued before January&nbsp;18, 1985, with contributions that were made before that date are not subject to post-death distribution requirements.<br /> <br /> The income tax treatment of life insurance death proceeds is governed by IRC Section&nbsp;101, not by IRC Section&nbsp;72. Consequently, the annuity rules in IRC Section&nbsp;72 do not apply to life income or other installment payments under optional settlements of life insurance death proceeds. However, the rules for taxing such payments are similar to the IRC Section&nbsp;72 annuity rules ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="63">63</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="79">79</a>). On the other hand, as noted earlier, death proceeds under an annuity contract (i.e., from some form of guaranteed death benefit) are taxed as amounts not received as an annuity ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="515">515</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="523">523</a>).<br /> <br /> Employee annuities, under both qualified and nonqualified plans, and periodic payments from qualified pension and profit sharing trusts are taxable under IRC Section&nbsp;72, but because a number of special rules apply to these payments, they are treated separately ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3532">3532</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3539">3539</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3939">3939</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3973">3973</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4083">4083</a>).<br /> <br /> Annuity with long-term care rider. Under the Pension Protection Act of 2006, qualified long term care insurance can be provided as a rider to an annuity contract, beginning after December&nbsp;31, 2009.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 72(a); Treas. Reg. &sect; 1.72-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 75-255, 1975-2 CB 22.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.7.2-11.<br /> <br /> </div></div><br />

<div class="Section1">The "separate accounts" in a variable immediate or deferred annuity are investment accounts, similar in some respects to mutual funds, with specified investment objectives. The contract owner purchases these accounts in "accumulation units" (for deferred variable annuity contracts) or "annuity units" (for immediate variable annuities). The cash value of the deferred annuity and the amount of each annuity payment in the immediate annuity will vary according to the performance of these units, which are re-priced daily.</div><br /> <div class="Section1"><br /> <br /> There is, in both immediate and variable annuities, an annual expense charge of each separate account which impacts the cash value of the deferred contracts and the amount of annuity payments in immediate contracts. The amount of this charge can usually change over time, and, in some contracts, may be waived in some years.<br /> <br /> Variable <em>deferred </em>annuity contracts also offer "fixed" accounts, which act like fixed deferred annuities in having a guarantee of principal and a fixed rate of interest that is usually declared each year. There is no annual expense charge for this "fixed" account.<br /> <br /> </div>

<div class="Section1">Although known by several different names and subject to a broad range of potential product features, an indexed variable annuity is essentially an annuity product where investment returns are tied to the performance of one or more stock indices (e.g., the S&amp;P 500 or the Dow Jones). Unlike straight equity investing, however, the product itself offers a cushion against investment losses in exchange for a cap on the potential for investment gains.</div><br /> <div class="Section1"><br /> <br /> Unlike fixed indexed annuities, in an indexed variable annuity, principal is not necessarily guaranteed. The carrier may offer 10, 15, or 20 percent (or more) buffers against investment losses, meaning that if the underlying investments generate a loss, the insurance carrier absorbs a set percentage of that loss before the taxpayer experiences any loss. As such, if the chosen index declines, for example, by 10 percent and the taxpayer has chosen a 15 percent buffer, the taxpayer's account value will decline only by the loss that exceeds the contract's downside protection.<br /> <br /> However, as a trade-off for the downside protection afforded by these contracts, participation in the linked index's gains will be subject to a cap for a fixed term of years. Despite this, the term of years can be as short as a single year for some contracts, allowing the taxpayer a degree of flexibility that he or she might not otherwise find available in a fixed indexed annuity product. Further, some contracts provide for an upside cap that fluctuates annually—or, in some cases, as frequently as weekly or monthly.<br /> <br /> Some insurance carriers even offer products that cover 100 percent of the downside risk of the investment, but these carriers also set the upside caps on these contracts at a lower percentage (in some cases, as low as 1.5 percent) that resets frequently (for example, every two weeks).<br /> <br /> Despite their lack of guaranteed principal, indexed variable annuities offer many of the benefits that traditionally accompany an annuity product, including the valuable elements of tax deferral and death benefits for account beneficiaries.<br /> <br /> </div>

<div class="Section1">A variable deferred annuity is a kind of deferred annuity in which the contract value can, and usually will, vary daily to reflect the performance of the &ldquo;separate accounts&rdquo; (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="510">510</a>) chosen. As with all deferred annuities, there are two periods in the contract.<div class="Section1"><br /> <br /> The &ldquo;accumulation period&rdquo; lasts from contract issue until the annuity starting date (ASD) (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="536">536</a>), during which the &ldquo;accumulation units&rdquo; of the separate accounts chosen will vary in value (and the contract value, which is the sum of those units, as well). Interest is not credited to a variable deferred annuity. Any contract &ldquo;gain&rdquo; is the result of increases in the value of the accumulation units chosen.<br /> <br /> The &ldquo;annuity&rdquo; or &ldquo;payout&rdquo; period lasts from the ASD until the end of the annuity payout period chosen. During this period, the amount of each year&rsquo;s annuity payments will vary to reflect investment performance unless a &ldquo;fixed&rdquo; annuity payout method has been chosen (in which case, the payouts will act like, and be taxed like, payments under a <em>fixed </em>contract.<br /> <br /> </div></div><br />

<div class="Section1">A deferred income annuity, which is sometimes referred to as a "longevity annuity" (DIA) or an advanced life deferred annuity (ALDA) – is an annuity contract that (generally) provides no cash value or death benefits during a deferral period, and begins to make annuitized payments for life at the end of that period, if the annuity owner is still alive. For instance, the contract for a 60-year-old might provide that payments will not begin until age 85, but upon reaching that age, payments will be made for life. Due to the long deferral period and the accumulation of significant mortality credits, the payments that ultimately begin may be very large relative to the original payment amount. Some deferred income annuities offer a pre-annuity starting date death benefit equal to the premium paid or premium paid plus a stipulated rate of interest. These contracts provide significantly lower guaranteed annuity payments than those with no such benefit.</div><br /> <div class="Section1"><br /> <br /> The IRS has issued a private letter ruling explaining the tax treatment of a so-called longevity annuity.<a href="#_ftn1" name="_ftnref1">¹</a> According to the IRS, a longevity annuity qualifies for favorable treatment, which means payments are taxed under the exclusion ratio ("amounts received as an annuity") rules when they begin.<br /> <br /> This treatment applies as long as, on the deferral period end date, the contract's contingent account value becomes the cash value and is accessible by the owner through:<br /> <blockquote>(1)     the right to receive annuity payments at guaranteed rates,<br /> <br /> (2)     the right to surrender the contract for its cash value,<br /> <br /> (3)     the right to take partial withdrawals of the cash value, and<br /> <br /> (4)     a death benefit.</blockquote><br /> The IRS concluded that a longevity annuity is an annuity contract for purposes of IRC Section 72 because the contract is in accordance with the customary practice of life insurance companies and the contract does not make periodic payments of interest.<br /> <br /> In support of its first conclusion, the IRS noted that insurance companies historically have issued deferred annuity contracts that, like longevity annuities, did not have any cash value during the deferral stage and did not provide any death benefit or refund feature should the annuitant die during this time. Thus, in the IRS' opinion, survival of the annuitant through the deferral period is not an inappropriate contingency for the vesting of cash value and the application of annuity treatment to the proposed contract.<br /> <br /> In reaching the second conclusion, the IRS took note of the fact that the longevity annuity (1) provides for periodic payments designed to liquidate a fund, (2) contains permanent annuity purchase rate guarantees that allow the contract owner to have the contingent account value applied to provide a stream of annuity payments for life or a fixed term at any time after the deferral period, and (3) provides for payments determined under guaranteed rates.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Let. Rul. 200939018.<br /> <br /> </div>

<div class="Section1">A variable immediate annuity is an immediate annuity in which the amount of each year&rsquo;s annuity payment varies with the investment performance of the &ldquo;separate accounts&rdquo; chosen by the contract owner (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="510">510</a>).<div class="Section1"><br /> <br /> With regard to the taxation of annuity payments made under a variable immediate annuity (or a deferred contract that has been annuitized under a &ldquo;variable payout option&rdquo;), it would not be feasible, or equitable from a revenue standpoint, to apply the regular&nbsp;annuity rules in taxing such payments. If investment experience were very favorable, for example, the application of a constant exclusion ratio would result in a correspondingly increased tax-free portion.<br /> <br /> Treasury regulations, therefore, provide special rules for taxing variable annuities. However, for taxable years beginning after December&nbsp;31, 1983, a&nbsp;variable&nbsp;annuity&nbsp;contract will not be treated as an&nbsp;annuity and taxed under these rules&nbsp;unless&nbsp;the underlying investments of the segregated asset account are adequately diversified.<a href="#_ftn1" name="_ftnref1">¹</a> (See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="550">550</a>.)<br /> <br /> In general, these rules provide that the amount which can be excluded from gross income in a taxable year is the portion of the investment in the contract which is allocable to that year. This is determined by dividing the investment in the contract by a multiple taken from the&nbsp;annuity&nbsp;tables which represents the anticipated number of years over which the&nbsp;annuity&nbsp;will be payable.<a href="#_ftn2" name="_ftnref2">²</a> All amounts received in excess of this yearly exclusion are fully taxable. The amount so determined may be excluded from gross income each year for as long as the payments are received if the&nbsp;annuity starting date was before January&nbsp;1, 1987.<br /> <br /> In the case of an&nbsp;annuity&nbsp;contract with a starting date after 1986, the amount determined may be excluded from gross income only until the investment in the contract is recovered.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 817(h).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.72-2(b)(3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 72(b)(2).<br /> <br /> </div></div><br />

<div class="Section1">Strictly speaking, the term &ldquo;annuity&rdquo; refers to a series of payments over time in which the principal (or purchase price) and interest are amortized over the payout period, so that no value remains at the end of the annuity period; it is a <em>stream of income.</em> However, most people who use the term &ldquo;annuity&rdquo; are referring to an <em>annuity contract</em>, under which that stream of income is guaranteed.<div class="Section1"><br /> <br /> There are several types of annuity contracts: (1) commercial annuities, which are contracts between a purchaser and an insurance company, (2) charitable gift annuities (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="607">607</a>), and (3) private annuities (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="603">603</a>). With the exception of Q <a href="javascript:void(0)" class="accordion-cross-reference" id="603">603</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="609">609</a>, all of the discussion in this book will deal with <em>commercial annuities.</em><br /> <br /> There are many types of commercial annuities and they are very different because they are designed to do very different jobs. For this reason, any statement that begins &ldquo;Annuities are&hellip;.&rdquo; is probably misleading or outright false, precisely because the term covers so many different types of contract.<br /> <br /> The chart below shows the various types, in terms of <em>when annuity payments begin.</em><a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <a href="https://imageserver.amlaw.com/tax-facts/uploads/2017/12/Fig-1-1-2.jpg"><img class="size-medium wp-image-38832 aligncenter" src="https://imageserver.amlaw.com/tax-facts/uploads/2017/12/Fig-1-1-2-500x334.jpg" alt="" width="500" height="334"></a><br /> <br /> The following chart shows these types in terms of how the contract value is invested.<br /> <br /> <a href="https://imageserver.amlaw.com/tax-facts/uploads/2017/12/Fig-2-1-2.jpg"><img class="size-full wp-image-38835 aligncenter" src="https://imageserver.amlaw.com/tax-facts/uploads/2017/12/Fig-2-1-2.jpg" alt="" width="432" height="254"></a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Chart from &ldquo;John Olsen&rsquo;s Guide to Annuities for the Consumer&rdquo; (John L. Olsen, 2015), by permission.<br /> <br /> </div></div><br />

<div class="Section1">A fixed immediate annuity is an immediate annuity (a contract in which regular annuity payments must commence no later than one year after purchase) in which the payments will remain level or increase only in accordance with a "cost of living" rider, if elected. The payments will persist for the entire annuity payout period, which may be a term of years, the lifetime(s) of one or two annuitants, or the latter, with a "refund provision" that will take effect if the annuitant(s) die prior to the refund guarantee period.</div><br /> <div class="Section1"><br /> <br /> Some older fixed immediate annuities are not "commutable" (i.e., they cannot be modified after annuity payments begin). Others provide for commutation, including the right of the owner to take a cash settlement in lieu of future annuity payments.<br /> <br /> </div>