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All About Deferred Annuities

Fixed, Variable, Equity Indexed and Longevity - All Forms Of Deferred Annuities


With deferred annuities, you deposit your funds with an annuity company (by investing in either a fixed, variable, longevity, or equity indexed annuity) and the taxes on any investment gains are deferred until such time as you take a withdrawal. (Any gain withdrawn prior to your age 59 ½ will be subject to a 10% penalty tax in addition to ordinary income taxes.)

Written into your deferred annuity contract will be the option to turn your deferred annuity into an immediate annuity after a certain amount of time has passed; essentially you are letting your earnings defer until such time as you desire to turn the investment into a guaranteed stream of income.

Deferred annuities can come with all sorts of features (at a cost) that provide specific types of death benefits and/or future income guarantees.

Types of Deferred Annuities

  • Fixed Deferred Annuity
    A fixed deferred annuity works much like a certificate of deposit; except, instead of having to claim the interest income on your tax return each year, the interest is deferred until such time as you take a withdrawal from the annuity contract. When you purchase a deferred fixed annuity, the insurance company will tell you the guaranteed interest rate your funds will earn.

    For risk adverse investors who will not need the interest income from their investment until age 59 ½ or later, fixed annuities can be an attractive option. Before you buy a fixed annuity compare the return being offered to other safe investment choices like certificates of deposit, and government bonds.

  • Variable Deferred Annuity
    Investing in a variable deferred annuity is a lot like owning a group of mutual funds. These mutual funds are called sub-accounts when they are in an annuity. You have control over the amount of investment risk you have by choosing from a pre-selected list of sub-accounts including both bond and equity investments. Your investment returns will vary depending on the performance of those underlying sub-accounts.

    I think most investors would be better off investing in a portfolio of index mutual funds, rather than a variable annuity, for the following two reasons:
    • Beware Of Variable Annuity Tax Deferral
      Because the investments are inside of an annuity, all taxes are deferred until such time as you take a withdrawal. Beware, the tax deferral of a variable annuity is often touted as an advantage by annuity salespeople, but for many, it can actually turn out to be a disadvantage.
    • Variable Annuity Riders and Death Benefits Come At High Costs
      Annuity companies provide a whole array of features called riders. These riders can provide death benefit guarantees and future income guarantees, often at high costs which erode your investment returns.

  • Equity Indexed Annuity
    An equity-indexed annuity functions like a fixed annuity in some ways, and like a variable annuity in other ways. Equity-indexed annuities have two components: a minimum guaranteed return, and the possibility of earning a higher return by crediting your account with a return based on a formula that is tied to a popular stock market index, such as the S&P 500 Index. The formulas inside equity-indexed annuities are often difficult for an average person to understand, and equity-indexed annuities often have high surrender charges (lasting for ten to fifteen years). For these two reasons, I do not like equity-indexed annuities, and think most investors can find better investment choices.

  • Longevity Annuity
    When you purchase a longevity annuity, it is much like purchasing “long life expectancy insurance”. For example, suppose at age 60, you deposit $100,000 in a longevity annuity. The insurance company guarantees to provide you with a specified amount of life-long income at your age 85. This would leave you free to spend other assets, knowing you had a guaranteed stream of income to support you later in life.
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