In This Deferred Annuity Guide

What is a Deferred Annuity?

A deferred annuity is a contract issued by an insurance company that guarantees a future income stream that begins no sooner than one year from the contract issue. 

If you purchase an annuity that begins income payments within the first 12 months of issue you have purchased a single premium immediate annuity (SPIA)

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: 

  1. Accumulation
  2. Distribution (Income)

Accumulation Phase

Cartoon drawing of woman putting money into safe and taking it out on other side as older woman

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. 
Single-Premium Deferred Annuity (SPDA)
If you purchase a single premium deferred annuity your contract is purchased with a single lump sum and does not allow for additional deposits.
Flexible-Premium Deferred Annuity (FPDA)
If you purchase a flexible premium deferred annuity your contract is purchased with an initial lump sum and allows you to make ongoing contributions for the remainder of the accumulation phase.

Distribution Phase (or Income Phase)

Cartoon of man fisher and diagram of making money deposit and the getting money back monthly

During the Income Phase, you begin to receive distributions from your annuity. The manner in which you receive these payments is up to you. There are many different income options available to you.


You can annuitize your deferred annuity which turns it into an income stream that is guaranteed for your lifetime or for a certain period. There are multiple annuitization options available as well. 

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. 

Systematic Withdrawal

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


Fixed Annuity

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)

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 or fixed index annuity.

Pros and Cons of Deferred Annuities



  • Tax Deferral
  • 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

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