Deferred Annuities Vs. Payout Annuities
An annuity is a contract with an insurance company that provides the contract buyer with a fixed stream of payments. Annuities are often used to provide primary or supplemental retirement income. One unique feature of annuities is the ability to select a payment option that will last for the lifetime of the recipient.
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Annuity Time Frame
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The difference between a deferred annuity and a payout annuity is the time frame when the payments begin. The most widely used term for payout annuity is immediate annuity. When an annuity buyer selects an immediate annuity, the monthly payments start 30 days later and last as long as the contract stipulates. A deferred annuity has the start of the annuity payment period deferred until some point in the future. The deferral period can be years, putting off the annuity payments until they are needed in retirement.
Deferred Annuity Features
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A deferred annuity allows a deposit into an annuity contract to earn interest or grow in value until it is time to start the annuity payout. The earnings in a deferred annuity are tax-deferred until withdrawals are made. The tax-deferral feature is a major reason to select a deferred annuity as a retirement savings vehicle. Deferred annuities can be used in addition to employer retirement plans and IRAs to accumulate assets for retirement. In retirement, a deferred annuity owner can elect to convert the contract to an immediate annuity or chose lump sum or partial withdrawals instead.
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Immediate Annuity Choices
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The immediate or payout annuity is an irrevocable choice once the payout option has been selected. There is a range of payout options that can be selected for an immediate annuity. A fixed payment period will have the annuity payout over a set period of time such as 10 or 20 years. Another option is a lifetime payout. With a life payout, the recipient of the payments cannot outlive the annuity payments. The insurance company guarantees the payment for life. A life payout can be further modified with a minimum number of payments or dollar amount of payout if the recipient dies early.
Lifetime Annuity Payments
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If an annuity owner selects a lifetime annuity payment, the insurance company uses the recipients age, current interest rates and the company's life expectancy tables to calculate the monthly payment. The insurance company pays the monthly payment for as long as the recipient lives. This is the contract between the insurance company and the recipient when the lump sum amount is exchanged for the life annuity.
Types of Annuities
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The Securities and Exchange Commission notes that annuities can be purchased in two types. Fixed annuities pay a set rate of interest during the deferral period. The principal and interest of a fixed annuity is guaranteed by the insurance company. During the payout phase, the payments of a fixed annuity do not change. A variable annuity uses mutual fund type sub-accounts to generate growth of the annuity contract during the deferred annuity phase. The value of a variable annuity contract can gain or lose with the securities markets. The insurance company guarantees a minimum death benefit of at least the amount invested for a deferred variable annuity. In the payout phase, the payments from a variable annuity can fluctuate based on the performance of the sub-accounts.
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