Deferred Annuity
What Is a Deferred Annuity?
A deferred annuity is a contract with an insurance company that vows to pay the owner a customary income, or a lump sum, sometime not too far off. Investors frequently utilize deferred annuities to supplement their other retirement income, like Social Security. Deferred annuities vary from immediate annuities, which start making payments right away.
How Deferred Annuities Work
There are three essential types of deferred annuities: fixed, indexed, and variable. As their name suggests, fixed annuities guarantee a specific, guaranteed rate of return on the money in the account. Indexed annuities give a return that depends on the performance of a specific market index, like the S&P 500. The return on variable annuities depends on the performance of a portfolio of mutual funds, or sub-accounts, picked by the annuity owner.
Each of the three types of deferred annuities develop on a tax-deferred basis. Owners of these insurance contracts pay taxes just when they make withdrawals, take a lump sum, or start getting income from the account. By then, the money they receive is taxed at their ordinary income tax rate.
The period when the investor is paying into the annuity is known as the accumulation phase (or savings phase). When the investor chooses for begin getting income, the payout phase (or income phase) starts. Many deferred annuities are structured to turn out revenue until the end of the owner's life and in some cases for their mate's life also.
Special Considerations
Deferred annuities ought to be viewed as long-term investments since they are less liquid than, for instance, mutual funds purchased outside of an annuity.
Most annuity contracts put severe limits on withdrawals, for example, permitting just one every year. Withdrawals may likewise be subject to surrender fees charged by the insurer. Furthermore, in the event that the account holder is under age 59\u00bd, they will generally face a 10% tax penalty on the amount of the withdrawal. That is on top of the income tax they need to pay on the withdrawal.
Before purchasing an annuity, buyers ought to make sure they have sufficient money in a liquid emergency fund.
Prospective buyers ought to likewise know that annuities frequently have high fees, compared with different types of retirement investments. Fees can likewise differ widely starting with one insurance company then onto the next, so it pays to shop around.
At last, deferred annuities frequently incorporate a death benefit part. Assuming the owner passes on while the annuity is still in its accumulation phase, their heirs might receive some or the account's all's value. On the off chance that the annuity has entered the payout phase, notwithstanding, the insurer may essentially keep the leftover money except if the contract incorporates a provision to keep paying benefits to the owner's heirs for a certain number of years.
Highlights
- A deferred annuity is an insurance contract that vows to pay the buyer a standard income or a lump sum of money at some date from here on out. Immediate annuities, paradoxically, begin paying right away.
- Deferred annuities come in several unique types — fixed, indexed, and variable — which determine how their rates of return are computed.
- Withdrawals from a deferred annuity might be subject to surrender charges as well as a 10% tax penalty in the event that the owner is under age 59\u00bd.
