How do deferred annuities work?


As their name suggests, deferred annuities are annuities wherein payments are "deferred" or postponed for a period of time. During the so-called "accumulation" period the premiums paid build up interest rate so that when the payout period begins, there is a substantial sum accumulated.

Deferred annuities are the best solution for people who have some cash to invest and whose retirement is way ahead in time. The longer the period, the more funds there will be for the annuitant or annuity holder to use at retirement or at the specified payout starting date. A great advantage for owners of deferred annuities is that the money in them accumulates on a tax-deferred basis.

When you buy a fixed deferred annuity with a lump sum, it is called single-premium deferred annuity.

Alternatively, you can opt for an annuity where you can vary the premium. The latter variant which provides greater flexibility is called flexible-premium annuity.

Annuity Settlement Options

  • If the annuitant of a deferred annuity dies before the beginning of the payout period, the beneficiary named in the contract receives the death benefits amounting to the cash value.
    • For fixed deferred annuities the death proceeds are the sum of the premiums and interest, minus any surrender charges, unless the latter are waived.
    • For variable deferred annuities the cash value is contingent on the market performance and investment experience. If the funds have dropped to an amount lower than the amount of premiums, some insurers might agree to pay a death benefit equal to this amount.
  • If the annuitant is alive at the end of the accumulation period, the deferred annuity owner has the following settlement options:
    • Cash - the proceeds can be either taken put in a lump sum, or in installments.
    • Life annuity (no refund) - according to this option, the annuitant receives a life income only while alive. No death proceeds are paid after the annuitant dies. This option is suitable for single people who need maximum lifetime income.
    • Life annuity (guaranteed payments) - also called life annuity with period certain, is perfect for people who wish to provide guaranteed payments for their families in the event of their premature death.
    • Installment refund - a life income is paid to the annuitant.
    • Joint-and-survivor annuity - benefits are paid to the last person to die, based on the lives of two annuitants, such as husband and wife or brother and sister.
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