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What is an Annuity?

Annuities are contractually-executed, relatively low-risk investment products; the insured (usually, an individual) pays a life insurance company a lump-sum premium at the start of the contract. That money is to be paid back to the insured in fixed, incremental amounts, over some future time period (predetermined by the insured). The insurer invests the premium; the resulting profit/return on investment fund the payments received by the insured, and, compensate the insurer.

Conventional annuity contracts provide a predictable, guaranteed stream of future income (e.g., for retirement) until the death(s) of the beneficiaries(s) named in the contract, or, until a future termination date – whichever occurs first. These financial instruments have been used to accumulate funds and provide significant and sudden increases in personal income (via future, lump-sum withdrawals), all while legally avoiding the taxes (e.g., income-, capital gains-, estate-) that would otherwise be assessed on them.

Immediate Annuities vs. Deferred Annuities


Immediate annuities and deferred annuities are two different types of annuity contracts that offer various benefits and features to individuals looking for guaranteed income in retirement.

Immediate Annuities:
– They are purchased with a single lump-sum payment and begin providing income payments to the annuitant almost immediately, typically within 30 days.
– They are designed for individuals who need immediate income and want to start receiving payments right away.
– The income payments from immediate can be fixed, meaning they are set at a predetermined amount for a specific period or for the rest of the annuitant’s life, or variable, meaning they fluctuate based on the performance of underlying investments.
– Immediate annuities provide a guaranteed income stream that is not affected by market fluctuations or interest rate changes.
– These are suitable for individuals who want a predictable and stable income flow in retirement, regardless of market conditions.

Deferred Annuities:
– As the name suggests, have a delay between the time the contract is purchased and when the income payments begin.
– Deferred annuities are funded by either a single premium payment or a series of premium payments over time.
– They include an accumulation phase, during which the annuity value grows tax-deferred based on the performance of underlying investments.
– The annuitant can choose between various investment options, including fixed interest, indexed, or variable options, depending on the type of deferred annuity.
– The income payments from deferred annuities are typically deferred until a chosen future date, such as retirement, allowing for greater accumulation of funds during the accumulation phase.
– Deferred annuities are suitable for individuals who are planning for retirement in the future and want to build up their annuity value over time before beginning to receive income payments.

Overall, immediate annuities provide immediate income, while deferred annuities allow for accumulation and growth of funds before beginning income payments. The choice between the two annuity types depends on an individual’s financial goals, time horizon, and need for immediate income.