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What’s The Difference Between Immediate and Deferred Annuity

by Nehemiah Marcus

An excellent strategy to ensure a reliable source of retirement income is through annuities. When it comes to annuity income payments, there are two methods: immediate and deferred.

Within a year after acquiring an annuity contract, you begin receiving income payments with an instant annuity, which is normally funded with a single lump-sum payment.

Deferred annuity payments do not begin for at least a year after the contract is purchased. A deferred annuity can be bought with one large payment or several smaller ones.

Annuity Defined

A contract between you and an insurance provider known as an annuity provides you with a source of income, usually for retirement.

Payments are made by the insurer in the form of either current or future revenue. Payments may be made all at once or in a series of regular installments.

In some circumstances, an annuity provides payout guarantees of a fixed financial amount. In other instances, depending on the performance of the underlying investments in the annuity, income may be greater or less than what you contributed.

Three types of annuities are offered by insurers:

  • Fixed Annuity. It offers a fixed rate of return on the money you contribute and is the simplest sort of annuity. Regardless of how the broader financial markets are doing, you get that rate of return. Payments could continue for a set number of years or for the rest of your life, depending on the contract.
  • Index annuity An index annuity’s returns correspond to the performance of a market index. In an index annuity, contributions can be made gradually over time or all at once, and payouts can be provided right away or later.
  • Variable Annuity In a variable annuity, you often buy mutual funds, and the income payments you receive fluctuate based on how well your chosen investment options perform. A variable annuity can be purchased in one single sum or over the course of several payments, much like regular annuities. You might also get immediate or delayed income payments.

Comparing Deferred and Immediate Annuity

Immediate and deferred annuities are similar in many ways. Both, for example, are typically offered as fixed, index, or variable annuities. But they differ in a number of crucial ways.

1. Funding

A deferred annuity is funded through a different process than an instant annuity.

For an instant annuity, the accumulating phase is brief. You pay the premiums in one large sum to cover it all at once.

You can choose between a single-premium deferred annuity (SPIA), which is a single payment, and a flexible-premium deferred annuity, which is a series of payments.

A deferred annuity also differs from other retirement plans like a 401(k) or individual retirement account in that there are no yearly contribution limits (IRA).

2. Payouts

Within a year of the contract’s effective date, you begin receiving income when you buy an instant annuity. When it comes to locking in a consistent income stream for a predetermined amount of time, such as five to twenty years or your entire life, this form of annuity can be extremely helpful.

The benefits of an instant annuity are normally greatest for healthy individuals with long life expectancies. Unless the contract contains a death benefit or makes specific provisions for beneficiaries, your survivors or heirs will likely not be able to receive the money if you hold an instant annuity and pass away sooner than you anticipated.

The costs may increase if you want to make sure that your beneficiaries, heirs, or surviving can receive payments from your immediate annuity.

Deferred annuities are designed to provide you with long-term income during retirement.

If you have a deferred annuity, the payout term is postponed for at least a year after the annuity is purchased. Payouts could start in five years or they could continue your entire life, for instance. The deferment term is specified in the annuity contract.

3. Withdrawals

You may occasionally be able to take money out of a deferred annuity before benefits begin. Lower returns and financial penalties, however, could be the result.

An instant annuity typically doesn’t offer cash surrender benefits and doesn’t permit partial withdrawals before payouts start. The amount of money left over after you cancel the annuity is its cash surrender value.

4. Returns

Deferred annuities typically offer higher returns than immediate annuities. Why? An immediate annuity has less time to accrue earnings because of how money is accumulated and distributed, whereas a deferred annuity has more time to produce returns.

Immediate and Deferred Annuities: How Are They Funded?

You fund a qualified annuity, such as a 401(k) or conventional IRA, with pretax money if it is an immediate or delayed annuity. This money is not yet subject to tax. As a result, you must pay taxes on all of the money you withdraw from the annuity, including both the money you put in and the money you earned.

You fund your immediate annuity using after-tax money if it is not qualifying. This indicates that taxes on the money have already been paid. You will therefore only be taxed on the annuity earnings.

Who Is An Immediate Annuity For?

According to annuity distributor Blueprint Income, an immediate annuity could be a wise choice if:

  • Benefits from Social Security and pensions won’t cover your regular outgoings
  • You have retired or are going to retire.
  • Your retirement funds now stand at at least $250,000.
  • Your health is generally good to excellent.
  • You desire more security in your retirement.

According to the New York State Department of Financial Services, “If you are concerned with the risk of outliving your financial resources, then you might consider purchasing an immediate annuity at least in an amount sufficient to cover your basic living expenses.”

You might consider moving funds from a savings or retirement account to an instant annuity, or converting proceeds from a deferred annuity to an immediate annuity, advises the Insurance Information Institute.

Who Is A Deferred Annuity For?

According to Blueprint Income, you should consider a deferred annuity if:

  • Your regular expenses will be covered by social security and retirement payments.
  • You have years until retirement.
  • You’ve saved up less than $250,000 for retirement.
  • Your state of health is ordinary.
  • You desire to watch your money increase over time.

If you’ve reached the maximum amount of contributions to a retirement plan like a 401(k) or IRA, Western & Southern Financial Group, which specializes in life insurance and annuities, advises looking into a deferred annuity.

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