Immediate versus Deferred Annuities

An annuity is a contract between the insured and the insurance company to provide income for retirement. It typically offers regular payments made over time. Annuities have existed for over two hundred years. They are paid out over the recipient's lifetime or for a set amount of time. They are usually issued by insurance companies through licensed agents. Simply put, an immediate annuity is set up when you want the income now and a deferred annuity builds value over time and is converted to income later on. One key difference between immediate and deferred annuities is that deferred annuities can be bought with a lump sum payment or a series of regular payments.

A deferred annuity accumulates value over time and helps you save for things like retirement. This works to grow your assets. A fixed deferred annuity comes with some nice guarantees: it is guaranteed against loss by the insurer, it is guaranteed a minimum rate of return, and it has guaranteed annuity payout factors. Some benefits include tax advantages, no limits on contributions, and safety of premium so risk is minimized in a market downturn. A variable deferred annuity allow for more growth potential in return for a higher level of risk. Its value fluctuates, depending on how the investment options perform.

Deferred annuities allow for a lump sum payment rather than the payments over time. However, there are no stipulations for a lifetime guarantee. There are deferred annuities where you can withdraw money during the accumulation period - although there are limitations on the amount you can withdraw in a one year period.

An immediate annuity works particularly well for someone who might have come suddenly into a good deal of money and needs a better way of managing it without having to deal with investing it. Most people choose a fixed immediate annuity because of the guaranteed annuity payments promised. However, there is an increased interest in variable immediate annuities because of low interest rates and potential for strong equity ability.

Immediate annuities can be set up for payment over the course of a specified period of time (like 10 or 20 years) or indefinitely (like for a lifetime). There are some great benefits to choosing an immediate annuity such as security in future income, simplicity as the annuitant does not need to manage an investment portfolio, high returns (higher than CDs), and preferred tax treatment to name a few.

There are many different forms of immediate annuities. The most simple are the straight life or non-refund immediate annuity which guarantees the payments over the lifetime of one person. Other forms include period certain annuities where benefits are paid by the insurer for a specified period of time (like 10 or 20 years), straight life annuity where benefits are paid out only for the lifetime of the annuitant, joint and survivor annuities where fixed monthly income payments are made for the lifetime of two or more people.

Samuel Towers' writes to expand possibilities on the financial side of life. Currently he is examining what's possible in the world of structured settlements and annuities. What he learns, he'll share in his articles.

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