What is a Deferred Annuity?

Deferred annuities are long-term contracts between you and an insurance company that locks you into an annuity payment program that will not begin for years or even decades from the initial contract signing. These annuities often supplement social security benefits, stocks, bonds, cash and other investments that retirees may use as a means of income. 

Because of the term of this investment, deferred annuities often earn a significant amount of interest that builds up on top of the payments that you are set to receive. Many deferred annuities have a buyout clause that allows the annuitant to sell the annuity early. Usually, there are penalties for withdrawals before pre-specified payment distribution stages. 
 

Types of Deferred Annuities

Deferred annuities are offered in a variety of different manners which are typically catered to the investor’s preference. These preferences often can be narrowed down to rate preferences, age of return, and risk level. The most common types of deferred annuities are: 
 
  • Fixed Rate - This is an interest rate that stays consistent for the lifetime of the annuity. Once you sign to this rate, the annuity will always grow at the chosen pace.
  • Variable Rate - This interest rate is open to change, as your investments are placed into various sub-accounts like stocks, bonds, and mutual funds. There is a possibility to lose or gain earnings with this type of rate.
  • Longevity - This type of annuity pays the annuitant after reaching the age of 80. 
  • Equity Index Annuity (EIA) - These types of annuities work within the stock market, generally, so they are closely linked to variable rate annuities. Unlike variable rate annuities, however, they are guaranteed a rate of minimum return even if there is a negative fluctuation in the stock market.

 

Distribution Options for Deferred Annuities

Deferred annuities can be catered to an individual preference in regards to distribution as well as interest rate. The three most common distribution options are:

  • Lump Sum - The annuity is paid at one time and is taxable, based off of its qualification status (see below).
  • Periodic - Sometimes called systematic withdrawal, the annuity is returned through a series of taxed payments.
  • Annuitization - The annuity is returned in time-based distributions over a designated period.

 

Qualities of Deferred Annuities 

Deferred annuities are tax-deferred, meaning that taxes are only paid on the annuity at the time of withdrawal. The cost of withdrawal could be significant depending on whether or not your deferred annuity is qualified or non-qualified. When an annuity is qualified, it means that the initial investment funds were not previously taxed, hence it is qualified to be taxed at the time of withdrawal. Investment funds that would be considered tax-eligible are: 

  • 401(k)
  • Personal IRA
  • Contribution Plans
  • Employee Pension Plans

A non-qualified annuity means that the initial funds used to purchase the annuity have already been taxed, or are not taxable, hence the funds being non-qualified for taxation upon withdrawal. Of course, the interest that was accrued for the funds on the annuity is taxable, but that is the only part of these annuities that will be taxed upon payment dispersal. Sources for non-qualified deferred annuity funding are:

  • Certificates of Deposit (CDs)
  • Inheritances
  • Money market accounts
  • Personal savings that have already been taxed
  • Structured Settlements

 

Is My Money Guaranteed?

Just like all annuities, deferred annuities are contracts with insurance companies stating that you will receive a return on investment at a later date. While annuities are considered safe, there is a small chance that the insurance company you invest in could go bankrupt, causing you to lose your investment. However, most deferred annuities are guaranteed against loss and are linked to insurance guaranty associations that protect annuitants. 


Get Cash for Future Deferred Annuity Payments

J.G. Wentworth has a long history of helping people receive a lump sum of cash in exchange for their deferred annuity payments. If you or someone you love are interested in getting cash for your payments, call us for your free, no-obligation quote, and learn how we can help you get cash now!

 
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