Annuities, Single Premium

Fixed Annuities are long-term investment vehicles designed for retirement purposes.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawl. Guarantees are based on the claims paying ability of the issuing company. Withdrawls made prior to age 59^1/2 are subject to 10% IRS penalty tax and surrender charges may apply.

Riders are additional gurantee options that are available to an annuity or life insurance contract holder.  While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing.  Guarantees are based on the claims paying ability of the issuing insurance company.

A Single Premium Universal Life Insurance policy is paid for by a single, substantial, initial payment.  The policy remains in force so long as the Cost of Insurance (COI) charges have not depleted the account.

Since life insurance is generally a tax deferred plan, the interest earned in the policy was not taxable as long as it remained in the policy. Withdrawals from the policy were taken out principal first, rather than gain first and so tax free withdrawals of at least some portion of the value were an option.

In 1988 changes were made in the tax code, and single premium policies purchased after were "Modified Endowment Contract (MEC)" and subject to less advantageous tax treatment.  In a MEC, the premiums and accumulation will be taxed just like an annuity upon withdrawing. The accumulations will grow tax deferred and will still transfer tax free to the beneficiary under Internal Revenue Service Code 101a under certain circumstances.  A MEC is determined by total premiums paid in a 7 year period, and not by single payment. The IRS defines the method of testing whether a life insurance policy is a MEC. At any point in the life of a policy, a premium or a material change to the Single Premium Universal Life policy could cause it to lose its tax advantage and become a MEC.