Quick Answer
A deferred annuity has two periods. During the accumulation period, your money may earn interest on a tax-deferred basis. Later, during the payout period, the insurance company can turn the value into a series of income payments.
What a deferred annuity is
An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. With a deferred annuity, those income payments start at a later date that you choose, instead of right away.
The accumulation period
The accumulation period is the time between when you pay your premium and when income payments begin. Depending on the contract, you may pay a single premium or make more than one premium payment. Interest earned during this period is generally not taxed until you take money out.
The payout period
When you are ready for income, you can choose how the value is paid out. Common options described in the NAIC Buyer’s Guide include:
- Life only: income for your lifetime, with no payments to anyone after you die.
- Life with period certain: income for as long as you live, with payments guaranteed for a set number of years (usually 10 or 20) even if you die.
- Joint and survivor: income as long as either you or your beneficiary lives.
- Fixed period: income for a set number of years.
- Lump sum: the value paid all at once.
The size of income payments is based on the accumulated value in your annuity and the annuity’s benefit rate in effect when income payments start. The benefit rate usually depends on your age and sex, and the payment option you choose.
Before you buy
Deferred annuities are meant for long-term goals such as retirement income. Most have surrender charges if you take out more than the free withdrawal amount during the surrender period, and withdrawals before age 59½ may carry a 10% federal tax penalty in addition to ordinary income tax. Ask how long the surrender period lasts and what it costs to take money out early.
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This is general education, not a recommendation. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Read your contract and its disclosure for exact terms.