Deferred and Immediate Annuities and Investment Alternatives

An annuity is a financial product that accepts funds, realizes profits, and pays out to customers. This is a tool which is designed to grow funds to be used after retirement. Customers can choose from two varieties, deferred and immediate.

Deferred Annuities

This is a useful tool that helps to accumulate savings for a future period. The main advantage is that the gains are taxed only after they are withdrawn. Account holders receive payments in the form of a lump sum, installments, or income, but money is paid out when the investor or holder chooses to receive it. This tool works much like a savings account, but it is an insurance product. The account holder deposits his money with an annuity company. Taxes are paid upon withdrawal, and there is a penalty tax of 10 percent for withdrawals made before the age of 59 ½. Owners are allowed to convert to immediate annuities after a specified period. Some varieties come with income guarantees while others – with death benefits.

Types to Choose From

There are different types of deferred annuities, including variable, fixed, longevity, and equity indexed. A longevity annuity is a type of a long-life expectancy policy. For instance, an account holder deposits $150,000 at the age of 62. The insurer promises to provide the holder with a pre-agreed life-long income. Equity indexed annuities are another variety and offer the chance to earn more money. Larger gains are possible when the return is tied to the S&P 500 Index, Wilshire 4500, Wilshire 5000, or another stock market index. This financial product has a minimum guaranteed return. The surrender charges for canceling are usually high and remain in force for a period of 10 – 15 years. In the view of some experts, this financial product is a costly way to minimize potential losses. The terms and conditions vary based on the insurer and are part of the original contract. However, the fact that there is a minimum guaranteed return means that the account holder’s income is guaranteed even if the index performs poorly. There are also variable and fixed deferred annuities. The latter has similar features to a certificate of deposit. The only difference is that interest is deferred and taxes are paid on making a withdrawal. There is a guaranteed interest rate, which depends on the insurer. This financial instrument is a good choice for persons who won’t need the gains until they reach 59 ½. It is a wise idea to compare the gains to that of government bonds and certificates of deposit. There are different safe investment instruments such as money market accounts, government-backed securities, savings accounts, and others. Another option is variable deferred annuities which work much like owning a pool of mutual funds. Holders can choose from different equity and bond investments and other sub-accounts. The return on the investment depends on how well the chosen sub-accounts perform. There are two downsides to this type of investment instrument. One is that death benefits, income guarantees, and other riders are offered at a higher than normal cost. Another problem is variable annuity taxation. Holders end up paying more taxes than what they would have paid on other investment instruments.

Immediate Annuities

This is an insurance policy and an investment product that guarantees payment in return for a certain amount of money. Holders can choose from two options – one is increasing period and the other is level payments. Structured payments are another option to consider and in this case, they vary based on performance. Payments depend on the performance of certain mutual and bond funds. The most common use of this investment vehicle is as a source of pension income.

Other Varieties

Customers can choose from two other types – life annuities and annuities with period certain. The first type offers income over the lifetime of the holder. It has similarities with pensions and death benefit plans. The second type offers payments over a certain period of time. This is not the best option for people who are looking for a source of pension income.

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