What Is a Deferred Annuity?

An annuity is a contract under which an insurance company agrees to pay income to an individual in return for one large premium payment or a series of smaller payments.

Consumers purchase annuities with different strategies in mind. Some want to take payments over a fixed period or for their lifetime. Others use the annuity contract to accumulate dollars for retirement and then take loans or withdrawals whenever they need current distributions.

A deferred annuity delays the payout until some time in the future—often, retirement.

What Types of Deferred Annuities Are Available?

There are two broad types of deferred annuities. A single premium deferred annuity is one that’s funded by a single, large premium payment. A flexible-premium deferred annuity is funded by a series of smaller payments made periodically during the accumulation period.

How Do Deferred Annuities Work?

Net premiums are deposited into the insurance company’s general accounts, earning current interest rates—or, if greater, a guaranteed rate specified in the contract. Interest is left in the annuity and isn’t taxed as long as no funds are withdrawn.

The insurance company may assess surrender charges if the owner withdraws funds early in the contract. In practice, some charges may be waived for partial withdrawals made within limits specified in the contract. However, if the annuity owner is younger than age 59½, a 10% federal tax penalty is added to the regular income tax on the taxable part of the withdrawal unless certain exceptions apply.

How Is Income Paid?

The annuity owner can select from numerous settlement options in determining how the payout will be made. A straight-life annuity stops making payouts when the annuitant dies, regardless of how much of the annuity still remains in the account.

A joint-and-last-survivor annuity makes payments until the last named annuitant dies.

With a period-certain or amount-certain annuity, income is paid for a specified period or in a specified amount until funds are used up.

A refund annuity continues making payments if the annuitant dies before recovering the entire amount. The remaining funds in the annuity are paid to a named beneficiary.

What Are the Benefits?

Looked at in their entirety, annuities provide a method to accumulate retirement income, tax-deferral of earnings while they remain in the contract, and withdrawal privileges. Add to these benefits a variety of options for receiving income when the time for distribution arrives.

The success of a financial strategy is often more dependent on its systematic nature than its rate of return.
Kurt G. Poetschke
Private Client Division
Successful people make a habit of doing what unsuccessful people are unwilling to do.
Holly L. Hullum
Private Client Division
Compound interest is good, compound taxation is bad.
Registered Financial Consultant Managing Partner - Denton
All well managed portfolios hold defensive reserves.
Harlan W. Wiese RFC LUTCF CLTC
Private Client Division Brokerage Manager
Our firm philosophy is simple: protect assets, grow wealth & live well.
William E. Watson III
Registered Financial Consultant President General Agent
The best time to plan is before you have to. If you wait until you have to plan, you are reacting and not planning, and your options are very limited.
Stephen Hull MBA, RFC
Registered Financial Consultant