How Annuity Premiums Work and Compare to Other Insurance Premiums
An annuity is an insurance product that can provide a stream of payments, tax-deferred growth, or other features for long-term investors. But how do you get money into an annuity in the first place? You add funds in the form of “premiums.”
Annuity premiums are the funds that you pay into an annuity. Because annuities are insurance contracts, they use insurance terminology. Payments to other insurance contracts (such as auto or life insurance, for example) are also called premiums. While the lingo can be confusing, annuity premiums are basically just account deposits.
Annuities are insurance company products, so any guarantees (such as lifetime income) are not government-guaranteed—they’re dependent on the insurance company’s ability to pay.
How Different Types of Annuity Premiums Work
A premium paid into an annuity is simply an investment in most cases.
- Initial investment: To start a contract, you might make an up-front investment into the product. For example, you may want to buy an annuity with $10,000. To do so, you’d complete an annuity application and write a check for $10,000. That $10,000 would be your initial premium paid into the annuity contract.
- Ongoing premiums: You can also make ongoing payments into an annuity (assuming your contract and relevant tax laws allow you to do so). Depending on your insurance company, you might be able to set up automatic monthly transfers via ACH, or you can just write a check or request an electronic transfer on-demand.
- One-time only: Some people only make one annuity premium payment—or one investment—with a lump sum of money. After that, they just leave that initial investment alone and let the annuity do its thing for several years (or longer). It’s always important to monitor your investments on an ongoing basis, but you don’t necessarily need to add to an account if you don’t want to.
- Account transfers: You can also fund an annuity by transferring assets from another account, whether it’s an annuity or another type of account. If transferring from an annuity, pay close attention to the rules regarding like-kind exchanges.
- Credit cards: You typically cannot make annuity deposits with a credit card. You might pay auto insurance (or other) premiums on plastic, but annuities are different because you’re generally making an investment with each premium.
- Dollar limits: Check with your insurance company to see if there are any minimum or maximum limits on premiums. If your annuity is also an individual retirement account (IRA), be mindful of IRS limits on how much you can contribute each year.
The Long-Term Commitment of an Annuity Premium
Before you contribute funds to an annuity, make sure you understand that you might be locking that money up for the long term. There are consequences:
- If you pull those funds out before the surrender period ends, you might have to pay penalty charges to the insurance company.
- You might face tax consequences for removing funds from an annuity, including income taxes due plus additional penalty taxes.
How Annuity Premiums Compare to Other Insurance Premiums
For some annuities, you don’t have to continually make premium payments like you do with a standard life insurance or auto insurance contracts. Of course, you should verify exactly what is required in your particular situation and with your particular contract—you don’t want to give up any rights or benefits!
Also, the more you contribute, the more you'll have later, so it might be helpful to add to any existing savings (assuming the annuity contract is the right place for those new additions, which you should continually reevaluate). If you need help, discuss your needs and your options with a Certified Financial Planner and a local tax professional.