Immediate Vs. Deferred Annuities

Annuities are designed to help you make the most out of your retirement years and to never run out of money. They are an insurance product, acting as a sort of “old age insurance.” However, if you have made it this far in your annuity search, you have probably learned that there are many different ways that insurance companies attempt to help you achieve this.

One of the variations that you will come across is in when and how payments are received. Generally speaking, this is broken down into two main categories—immediate and deferred. The timeframe that separates these two is generally agreed upon to be one year.

If you’re unsure about which of these annuities is best for you, keep reading. Here, we will break down the major differences between an immediate and a deferred annuity.

What is an Immediate Annuity?

What You Should Consider at this Time?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 usually take a large lump sum as a deposit and give you back a smaller amount each month.

There are many different payout options and riders that you can choose from with an immediate annuity. The most basic immediate annuity gives you a monthly payment each month for the rest of your life. Even if you have outlived your money, the annuity will keep paying you, guaranteeing that you have a source of income throughout your life.

Another choice is to add a spouse as a beneficiary. This way, you will receive a monthly payment for the rest of your life—and your husband or wife will receive the same after you pass away. The difference here, as you might have guessed, is that when you add a beneficiary to receive payments as well, the monthly payments will be lower. Either of these choices can be great, but you will want to pick the one that works best for your particular situation.

There are other methods of receiving your payment from an immediate annuity, but these are by the two most popular. If you have further questions on this, or if you are unsure of whether or not an immediate annuity can be helpful for you, then please get in touch with a financial professional today to go over your options and see which is best for you and your family.

What is a Variable Annuity?

Deferred annuities are for longer term investments. The long term is necessary because the stock market and other assets that vary in price can lose money over the short term. However, because the overall trend of the United States (and the world) economy is upward, the longer that a variable annuity is held, the less likely that the short term ups and downs will play a role in the profit rate that you will experience.

These annuities can start distributions any time 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.

If you never want to annuitize your contract, you do not need to. In fact, many individuals hold their money in an annuity, and only withdraw a small amount of it here and there when they need it. This is one of the benefits of an annuity. Most retirement accounts require you to begin distributions if you reach the age of 70 1/2. If you wait after this, you might even be slapped with a tax penalty. This is not the case with annuities. There is a benefit to doing this, but it all depends on what your individual financial situation is and what you are looking for out of an annuity. Again, if you have questions about this, please get in touch with a financial professional.

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.

Which type of annuity is best for you? Everyone will fit into a different category. Taking a look at your individual needs before you begin your search can help you to reduce the amount of time that you will spend on your search and help you find the best annuity a lot more easily.