Deferred Annuity

A deferred annuity is a contract you make with an insurance company. In exchange for paying over a sum the insurance company promises to pay you regular income payments at a future date. This is opposed to an immediate annuity which begins payments on the spot. In this article, we will go over the basics of how a deferred annuity works.

Types of Deferred Annuities

There are three types of deferred annuities; fixed, indexed, and variable. With a fixed annuity your returns are based on a set rate that will not change. The return of indexed annuities is based on the performance of a market index like the S&P 500. Lastly, a variable annuity’s return is based on the performance of funds in subaccounts that you choose as the annuity owner.

Basic Terms

There are a few basic terms you should be familiar with that apply to a deferred annuity. First, is an annuitant. This is the person whose age and life expectancy will be used to calculate annuity payments. This is usually the person who purchases the annuity. Second, is the accumulation phase. This is the time period during which the investor is paying money into the annuity. Third, is the payout phase. This is when you choose to begin receiving income from the annuity.

Advantages and Disadvantages

A deferred annuity comes with both advantages and disadvantages. Some of the advantages include tax deferred growth. All funds in the annuity grow tax deferred and are not taxable until withdrawn. They also provide you with a guaranteed income stream, helping you to fund your retirement. Then there are a few disadvantages. First, annuities typically have surrender charges. This is a percentage of the total funds withdrawn that are held back as a penalty. Second, there are limits on withdrawals. During the accumulation period you have strict limits on the amount of funds you can withdraw.

Purchasing an Annuity

If you decide that a deferred annuity is right for you, you will need to meet with a qualified agent who can help you sort through your options and find one that works best for you.

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