Deferred Annuities: Answers to Your Questions

Deferred Annuity Questions

Are you in the process of preparing for retirement? If so, you may be exploring the various financial tools available to help you manage your assets and income after you retire. From IRAs to insurance to investment products, you have a broad range of tools and products at your disposal.

An annuity is one potential tool to consider. Annuities are often used to generate income, minimize taxes, manage risk and more. There are several types of annuities, but most fall into one of two categories: immediate and deferred.

An immediate annuity is one in which your initial premium is immediately annuitized, or converted into a stream of income that’s guaranteed by the insurance company. For example, you may contribute a lump sum and, in return, receive a monthly payment for the rest of your life.

While immediate annuities are useful in specific situations, many individuals opt for the other type—deferred annuities. A deferred annuity is one in which the premium isn’t immediately converted into income via annuitization. Instead, your premium has the opportunity to grow. At some point in the future you can annuitize the value, take withdrawals or leave the funds to your beneficiaries.

Not sure whether a deferred annuity is right for you? Confused about how they work? Below are a few common questions and answers about deferred annuities. If you’re interested in learning more, contact a financial professional, who can help you determine whether a deferred annuity is right for your needs.

How do funds in a deferred annuity grow?

One of the appealing features of a deferred annuity is that your funds have the ability to grow on a tax-deferred basis inside the policy. How they grow depends on the type of annuity you have. There are several different types of deferred annuities, but the three most common are fixed, variable and indexed.

A fixed annuity is one in which your growth comes through the accumulation of interest that’s paid by the insurance company into the policy’s cash value. The interest rate is usually fixed for a predetermined period of time, such as one, three or five years. After that period is over, the rate may float. However, most policies have a guaranteed minimum interest rate. In fixed annuities, there is no risk of principal loss.

A variable deferred annuity is one in which your funds are invested in subaccounts, which are similar to mutual funds. Your growth is based on the performance of your investments. In most variable annuities there is some risk of loss. However, some policies offer optional features that provide some level of downside protection.

Finally, there are indexed annuities, which often blend elements of both fixed and variable policies. In an indexed annuity, you earn interest, but the interest rate is linked to the performance of investment markets. If a market’s index performs well, you may get more interest. If it performs poorly, you get less. However, you never lose money in an indexed annuity, even if the market has negative returns.

Do do deferred annuities have high fees?

There’s a common perception that annuities are high-cost investment tools. However, this often isn’t the case. Deferred annuities do usually have surrender charges. These are penalties that are paid if you surrender your contract or take a sizable withdrawal during a specified surrender period, usually the first few years after you open the policy. However, you only pay the surrender penalty in those instances.

Fixed and indexed annuities often have little or no fees outside of surrender charges. Variable annuities may have fees, but that’s true of many similar investment products. Often in a variable annuity you can choose from multiple features and benefits to adjust the cost.

How do I take income from a deferred annuity?

You can create income from a deferred annuity in a variety of ways. One option is to annuitize the contract value. The insurance company uses the contract value, your age and other factors to calculate a monthly payment guaranteed for the rest of your life.

The other option is to take systematic withdrawals. This may be preferable to annuitization, because withdrawals don’t require you to sacrifice your contract value. Some policies even have additional options that guarantee your withdrawals for the rest of your life.

Ready to learn more about whether a deferred annuity is right for you? Let’s talk about it. Contact us today at America’s Annuity. We can help you analyze your needs and identify the right strategies. Let’s connect soon and start the conversation.