In contrast to the Immediate Annuity, the Deferred Annuity delays distribution of payments until some point in the future after the accumulation phase has past. The accumulation phase begins when the annuity contract is signed and the annuity holder makes regular, periodic payments over a specified period of time outlined in the contract. The payment funds are invested by the insurance company and earn tax-deferred interest over the life of the accumulation phase.
Deferred Annuities are typically considered long-term retirement investment since the annuity contract limits the amount of liquidity during the accumulation phase. Even during the accumulation phase the annuitant can usually withdraw up to 10% per year without penalty. As soon as the accumulation phase has past, the annuity holder can take distributions as ordinary income in a lump sum or as payments. Deferred Annuities can have multiple investment types such as a Fixed Annuity, Indexed Annuity and Variable Annuity.
Deferred Annuity Payout Options – Riders and Features
Deferred annuities can have riders that give investors flexibility in choosing how future distributions might occur once the investor chooses to withdraw funds after the accumlation period.
Liquidity Provisions and Riders
- Regular Withdrawals: Annuitants can withdraw up to a fixed percentage from their annuity each year without a surrender charge. After the surrender period expires, the annuity is liquid and can be withdrawn from at anytime without penalty.
- Terminal Illness Rider
- Health Care and Long Term Care Rider
Withdrawal Benefit and Lifetime Income Riders
- Lifetime Income Benefit Rider (LIBR)
- Guaranteed Lifetime Withdrawal Benefit Rider (GLWB or LWBR)
- Guaranteed Minimum Income Benefit Rider (GMIB)
- Guaranteed Account Value Benefit Rider (GAVR)
Death Benefit Riders
In addition to riders, deferred annuities can have components such as “Bonus” and “No-Surrender” features.
Funding a Deferred Annuity
Single Premium Deferred Annuity: Deferred Annuities can be be funded via a single premium or single payment, that is invested for growth over a long period of time. This is a Single Premium Deferred Annuity.
Flexible Premium Deferred Annuity: Flexible Premium Annuiites are those funded by multiple payments over a period of time. Flexible Premium Annuities are only Deferred Annuities and are designed to have a significant period of payments into the annuity plus investment growth before any money is withdrawn from the Annuity.