Immediate Versus Deferred Annuities

An immediate annuity is designed to start distributing your funds back to you as soon as possible, usually before one year has passed since the initial premium. These are also sometimes called income annuities. The point of this type of annuity is to help you budget your money, while still earning a steady rate of return. Income annuities are generally paid for with a single lump sum, but there are exceptions—all of the paid premiums need to be added before the first distribution. These annuities take a large lump sum as a deposit and give you back a smaller amount each month.

Deferred annuities are for longer term investments. These annuities can start distributions anytime after the first year passes, but there is no maximum time limit as to how long you must wait before beginning the annuitization phase. You can start receiving distributions in two years or twenty years. Or longer. The important thing to remember with this type of product is that you will not have immediate access to your cash. If you need money quickly, this is not the right annuity for you. In fact, in many cases, you may have to pay a small surrender fee if you need to annuitize your contract too early.

Deferred annuities grant you a bit more freedom with premiums than immediate annuities afford. You can buy a deferred annuity with a lump sum and let it accumulate interest for years, or you can pay a little bit each month to add to your annuity’s value. Variable annuities are usually deferred, but you can also find fixed annuities in this category.

You need to give annuities with a bonus rate special consideration. These are found mainly in deferred annuities and the bonus that they offer is typically only valid for the first year of the contract. This is used as an enticement to attract customers to a specific contract. Oftentimes these can be a very good deal, but be sure that you read all of the fine print. The return rate for subsequent years might be very low and can, in some cases, offset all of the earnings gained with the bonus rate. Bonus amounts can be granted as a percentage of the initial deposit or as an earned percentage of return. Deferred annuities use these in order to get more customers, but they are not necessarily as beneficial as other deferred annuities with higher subsequent rates of return.