Deferred Annuities

An annuity contract dictates that the insuring company will make regular payments for a specified time period, or for the life of the person receiving the income (the annuitant), in return for receiving one or more premiums from the person who purchases the annuity (contract owner).The annuitant may or may not be the contract owner.

Annuitized payouts and all other guarantees are subject to the claims-paying ability of the issuing insurance company.

Consumers purchase annuities for different reasons. Some want to take payments over a fixed period or for life. Others want to use the annuity to accumulate money for retirement, taking loans or withdrawals if they need current distributions.

The annuities described below are called “fixed” annuities because they’re credited with a specified, fixed rate of interest. Some payout features are also fixed.

The Variations

An immediate annuity is purchased with a single premium and begins to make annuity payments immediately.

A deferred annuity is purchased with either a single premium or a series of periodic premiums and begins making payments at some time in the future.

A single-premium deferred annuity calls for the owner to fund the annuity with a single payment, the amount of which depends on the future income desired. This type of annuity is often purchased by an individual who has received or accumulated a large sum of money, such as an inheritance, a life insurance death benefit, a maturing bank certificate of deposit or a retirement plan distribution.

A flexible-premium deferred annuity, on the other hand, lets the owner make smaller periodic payments over the life of the annuity until income payments begin. The owner may increase or decrease the premium payment as circumstances change (within limits established by the insurer). Of course, if the owner desires a specific future income amount, he or she must pay attention to the premium required to purchase that future income

The Tax Picture

Taxes are deferred on earnings during the accumulation period as long as the owner does not withdraw funds. This applies to both single-premium and flexible-premium deferred annuities.

Nonqualified annuity payments are taxed under the IRC Section 72 annuity rules, which permit the tax-free recovery of basis over life expectancy. The balance of each payment is taxed as ordinary income.

If the owner makes a partial or complete withdrawal before reaching age 59½, the IRS adds a 10% tax penalty to the taxable portion of the withdrawal, unless certain exceptions apply. No tax penalty is assessed if the owner dies or becomes disabled, or if the withdrawal is part of a series of substantially equal periodic payments usually made for the owner’s life or life expectancy, or for the joint lives or life expectancies of the owner and a beneficiary. 

Annuity products clearly offer a number of choices in terms of how funds accumulate, how they grow, and how they’re paid out.

Please contact us for an in-depth review which will consider your own personal circumstances and desires to come up with the right match.