Is a Fixed Deferred Annuity a Good Investment?

The fixed deferred annuity is a solution of the insurance industry to loss protection needs and long-term savings. Annuity holders receive interest on their deposited funds just like the owners of liquid accounts at financial institutions and banks.

In addition to the benefits of ordinary deposit accounts, life insurance coverage is also offered as an added benefit by annuities. Besides this, the funds invested in deferred annuities are free from immediate tax. However, the absence of temporary taxation has a major drawback of Illiquidity.

Confusion of terminology clarified

Fixed and variable are two basic categories of annuities. Fixed annuities offer a fixed rate of return on investment while rate of return on variable annuities fluctuates greatly.

Fixed annuities ensure guaranteed return for a particular amount of time. In simple words, minimum final investment value is assured to the annuity owner or the policy holder.

Annuities vs. Other Investments

Most of the times, the returns offered by annuities are much better than other investments like money market accounts or certificate of deposits. This is mainly because your money is invested for a longer period of time.

The power of compound interest combined with time makes your ending balance much higher compared to other investment options.

Immediate vs. deferred annuities

It is necessary to understand these two sub categories of fixed annuities in order to make well informed investment decisions.

When you invest in an immediate annuity, you start receiving money shortly after investment. The process of periodic payment continues for a particular amount of time or for your entire life. A continuous cash flow is possible because of the accumulation of interest on the unpaid residual portion of your initial investment.

On the contrary, a deferred annuity rewards the investor after a certain time limit. The investor has to wait for a specified number of years to receive a lump sum or periodic payments after making the initial investment. Due to the accumulated interest over the years, the value of your investment grows substantially to a significant amount.

The common features of immediate and deferred annuities are as follows.

-Guaranteed rate of return and principal preservation

The original value of the investment will never fall except when the insurer becomes insolvent. The investor is assured of minimum return on the investment. Since the investor is assured of receiving a specific amount of money after a specified time, he is in a better position to plan financially for the long term.

-Guaranteed rate of return

Since the minimum rate of return is guaranteed on investment, the investors are able to plan their financial future in a better way.

-Death Benefit

Just like life insurance policies, annuities feature loss protection which enables the beneficiaries to receive a lump sum amount in case you die. On the contrary, if you have invested in conventional deposit accounts or CDs, your beneficiaries will only receive the initial investment and the accumulated interest going forward.

-More flexible withdrawal options

On maturity of annuity, the investor can withdraw the whole amount or opt for periodic receipts. This choice is not offered by any other investment options. The investor can either choose to reinvest the complete amount immediately or accept a lump-sum disbursement to absorb any tax effects.

Advantages of Deferred Annuities

Deferred annuities offer a major benefit in the form of tax deferral. Though you are required to wait for a specified amount of time to receive any funds, you receive the added benefit of tax relief as your investment grows.

Don't underestimate this great benefit with a fixed deferred annuity. Since the rates of taxes are high, it can take a huge part of your savings. For example, if you are eligible for a tax of 35 percent and the return on annuity is 5 percent, you will be able to realize the full 5 percent return due to tax deferrals.

On the other hand, if your returns are taxed immediately, the returns are reduced to 3.25 percent which is just above the yearly US rate of inflation of 3 percent. Thus, when a person whose investments are subjected to immediate tax retires, his or her investments hardly increase in terms of real money.

Jay Grieco is a publisher with an informational website concerning many types of annuities. Use this website as a research tool to find out more about the various kinds of annuities and how they may benefit you. Visit: http://www.annuityexplainedcenter.com

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