YOU ASK:

Is it better to buy a single-premium or a flexible-premium deferred annuity?

WE ANSWER:

This will largely depend on your current financial situation: single-premium deferred annuities require a single lump sum installment payable upfront, whereas under a flexible-premium deferred annuity you are given the freedom to vary the premium at your discretion.

Characteristics of Deferred Annuities

  • Under deferred annuities, income payments are deferred until a moment in the future, which is designated in the annuity contract.
  • Deferred annuities are financial vehicles for accumulating money prior to retirement on a tax-deferred basis.
  • Deferred annuities differ from immediate annuities in that their accumulation period is followed by the payout period. With immediate annuities, the two periods run almost simultaneously.
  • If the annuitant dies before the end of the accumulation period, the named beneficiary is entitled to receive a death benefit equal to the gross premium paid or the cash value, whichever is higher.

How Single-Premium Deferred Annuities Work

Single-premium deferred annuities are purchased with a lump sum and are preferred by those wishing to provide themselves with a lifetime income by a single payment. Of course, this option is suitable for people who at some point in their lives have a lot of money and whose professional life is not guaranteed for long, such as athletes and models.

What better and wiser investment than purchasing an annuity without the hassle of having to make regular contributions to its account? The lump sum starts accumulating interest and the accumulated value can be received by the annuitant upon retirement.

Flexible-Premium Deferred Annuities

Flexible-premium deferred annuities are perfect for people whose income is not very stable, as it allows the owner to vary the premium payments. Installments are flexible and can be paid as often as the annuity holder desires.

Though most insurers have introduced a minimum administrative fee payment, such as $25 or $50, flexible-premium deferred annuity holders can choose whether to pay every month, every year, or even skip a few payments, at their discretion.

Flexible-premium contracts don't charge a front-end load but they frequently have surrender charges. Insurers guarantee a minimum interest rate of 3-4% but current rates range from 5 to 11 percent.

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