What Is a Deferred Annuity?
A deferred annuity is a contract that you can purchase from an insurance company. In exchange for a lump sum payment or a series of payments, called the premium, the insurance company agrees to pay equal periodic payments to you over time. These payments will begin at some future time.
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Why Buy a Deferred Annuity?
Deferred annuities are often used for retirement planning. While you are still working, you can make periodic payments into a deferred annuity. Or, you can take money from a 401(k) or IRA and roll it over into a deferred annuity. Then, when you’re ready to retire, you can begin taking regular income from the annuity, so that it acts somewhat like a personal pension.
What Kind of Deferred Annuities Are Available?
Deferred annuities can be variable, fixed or indexed. These terms refer to the investments that underlie the annuity contract and give you a return on your investment. A variable annuity invests in mutual funds and other securities, so they have the potential to rise and fall with the market. Some variable annuity contracts have features that limit the downside to these investments, however, providing some guarantees around minimum income.
Indexed annuities have index funds as their underlying investments, so their performance will track to the index selected, such as the S&P 500.
Fixed annuities have fixed investments, like a CD or interest-bearing savings account. The rate can change over time, but there will always be a guaranteed minimum amount your money will earn.
How Much Income Will a Deferred Annuity Provide?
The amount of income you get from a deferred annuity will depend on several factors.
Your age when you purchase the annuity, the amount of time between the purchase and when you begin taking payments and your age when you begin taking income will all factor into the amount you will receive.
The younger you are when you purchase the annuity, and the longer you let your investment earn interest or returns before you begin taking income, the larger your periodic payments will be. The older you are when you begin taking income, the larger your payments will be, because your payments will, theoretically, last a shorter period of time.
This illustrates on of the advantages of deferred annuities. In most cases, once you begin taking payments from an annuity, they will continue for the rest of your life. If you outlive the insurance company’s expectation, you will get more money from the annuity than you would have from another, similarly structured investment. The disadvantage, of course, is that if you have a considerably shorter lifespan than expected, you may get significantly less than you otherwise would have.
Are There Other Kinds of Annuities?
Besides deferred annuities, there are immediate annuities. These annuities begin making periodic payments right away, within one month or one year, depending on the frequency of the payments, at the time when the annuity contract is purchased. Immediate annuities don’t have time to earn any investment returns, so the payout amount will be lower than that of a deferred annuity if everything else is equal.
Deferred annuities are complicated investment products, with many variations, so it’s important to understand them before committing. That said, the right annuity can provide retirement income that you cannot outlive, and that can mean priceless peace of mind.
This article originally appeared on GOBankingRates.com: What Is a Deferred Annuity?
