All annuities other than an immediate annuity are considered deferred annuities. Annuities receive tax-favored rules from the IRS as they are meant to be long term retirement savings vehicles.
In order to be classified as an annuity, each contract must include an option to be annuitized into a guaranteed lifetime income stream.
Even though all deferred annuities have the ability to be converted into guaranteed income many deferred annuities are bought for safe, tax-deferred accumulation. It is important to note that buying a deferred annuity does not mean you have to turn it into a lifetime income.
At the end of your contract term, you May 1035 or roll over your annuity to another annuity or totally liquidate the annuity and withdraw all of your funds.
The National Association of Insurance Commissioners (NAIC) published the “Buyers Guide for Deferred Annuities” that we recommend our customers read when considering an annuity.
The Two Phases of a Deferred Annuity
Deferred annuities have two phases:
During the accumulation phase, your annuity is accumulating interest on a tax-deferred basis. There are many types of deferred annuities and the type of deferred annuity you purchase will determine how your annuity earns interest.
You can elect to receive income payments guaranteed for your lifetime or you could elect joint life income which guarantees payments for as long as either you or your spouse are alive.
Another annuitization option is to annuitize for a Period Certain which simply means your payments are guaranteed for a certain period of time after which the payments will end. Most often Period Certain payments are for 10 or 20 years.
The final decision you’ll be faced with if you elect the annuitization option is the frequency of your payments. Monthly, Quarterly, Semi-Annual and Annual Payments are all available.
You can elect to take a lump-sum disbursement in which you receive your entire annuity’s account value in a single, one-time payment.
Under the systematic withdrawal option funds from your deferred annuity contract are dispersed through periodic payments. Under this method, funds in your deferred annuity continue to grow on a tax-deferred basis until withdrawn.
You can elect to have these withdrawals set up to be paid systematically, for example, a specific dollar amount sent to your checking account via EFT every month. However, you do not have to have income payments set up systematically. You could withdraw on an as-needed basis taking out more or less in any given year.
Deferred Annuity Types
A fixed annuity may be a good choice for those who want a guaranteed interest rate and principal protection. Fixed annuities pay a specific interest rate for a set number of years. You can compare current fixed annuity rates at our online annuity store.
Fixed Index Annuities (FIA)
A Fixed Index Annuity may appeal to those who want a chance for upside gains in a good market while also receiving a level of protection from possible downturns. Shop current rates available in indexed annuities at our online Fixed Index Annuity Store.
Variable Annuities (VA)
A variable annuity may be a good choice for those who want the long-term opportunity for growth in the market and who are able to handle the risks that volatility. Variable annuities allow you to invest directly in sub-accounts so you have more upside potential but also more downside potential.
Registered Index-Linked Annuities (RILA’s)
Registered Index-Linked Annuities, or RILA’s, were created as a “middle ground” or “hybrid annuity”. RILA’s provide exposure to a published stock market index along with a level of protection from market loss.
While this kind of annuity tracks the movement of an index, it does not directly invest in any stock or equity vehicle. Because you assume some of the risks of loss from market downturns, a registered index-linked annuity may allow for greater growth potential than a fixed annuity orfixed index annuity.
Pros and Cons of Deferred Annuities
Lifetime Income Benefits
No Contribution Limits
Principal Protection (unless you purchase a RILA or VA)
Death Benefit Avoids Probate
Gains are taxed as ordinary income, not capital gains
Less Liquidity – most annuity contracts allow for 10% free withdrawals annually during the accumulation phase
Limited Upside – While there is less risk there is also less upside potential
Annuities are distributed by My Annuity Store, Inc. Guarantees are subject to the claims-paying ability of the insurer. My Annuity Store, Inc. is a licensed fixed annuity producer and does not advise clients on the purchase of non-fixed annuity products. The information presented here is not intended to be a recommendation to purchase a fixed annuity, fixed index annuity, immediate annuity, longevity annuity, Qualified Longevity Annuity Contract, long-term care annuity, or any other investment or insurance product. Kiara Caudill California License: 4109080.
The contract features described may not be current and may not apply in the state in which you reside. Insurance companies often issue contracts that are ‘state-specific’. Insurance companies also change their products and information often and without notice. Annuities are subject to the terms and conditions of the specific contract issued by the insurer, are not FDIC or NCUA insured, are not bank guaranteed, may lose value, and are not a deposit. Please call (855) 583-1104 if you have any questions or concerns.
The information presented here is not a representation regarding the suitability of any concept or product(s) for an individual and is not intended to be tax or legal advice. You should always consult your own financial planning, tax, and legal advisors to determine if a fixed annuity, fixed index annuity, immediate annuity, longevity annuity, or Qualified Longevity Annuity Contract is suitable in your financial situation.