Immediate vs. Deferred Annuities

Deferred Annuity Surrender Charges

While deferred annuity owners are always fully vested in their contract values, they may be required to pay a fee for withdrawing them. Called surrender charges, they are applied if the owner takes withdrawals from or surrenders the contract within a specified period of time after buying the annuity. The surrender charge is typically defined as a declining percentage of the contract's accumulated value. For example, a deferred annuity may impose -a 7% charge during the first three years of the contract; -a 6% charge during the fourth and fifth year of the contract; or -a 5% charge during the sixth and seventh year of the contract, and so on. Once the surrender charge period has ended, no charges are imposed on future withdrawals or surrenders. Most deferred annuities apply surrender charges for the first five to ten years after contract issue. The length of the surrender charge period depends on the contract design and may be longer than ten years.

Deferred Annuity Death Benefits

If a deferred annuity owner or the contract's annuitant dies during the contract's accumulation stage, the contract's values are paid to the beneficiary as a death benefit. Owner-driven contracts pay the death benefit if the owner dies, while annuitant-driven contracts pay the death benefit if the annuitant dies. The death benefit amount that any given contract provides depends on whether its funds accumulate at a fixed rate or at a variable rate.

Deferred Annuity Values Are Nonforfeitable

Accumulated funds in a deferred annuity belong, at all times, to the owner. They are not forfeitable, even if the owner stops making premium payments. These values can be left intact within the contract for future annuitization. Or, they can be withdrawn, partially or in full, before the contract annuitizes. In fact, deferred annuity owners commonly do not annuitize their contracts. Instead, they take their accumulated values through withdrawals or full surrender of the contract. An annuity owner who wants to withdraw any values from his or her contract must simply notify the insurer. The insurer cannot withhold these funds or refuse to honor the owner's request.

Immediate vs. Deferred Annuities

An annuity's accumulation period can be as short as a month or as long as many years. This is the difference between an immediate annuity and a deferred annuity. Immediate annuities are purchased with a single sum of money to immediately begin distributing periodic payments. Deferred annuities are purchased with either a single sum of money or through periodic investments, but in either case annuity payments do not begin until a future date

Deferred Annuities

In contrast to immediate annuities, a deferred annuity is a contract under which annuitization (i.e., conversion to annuity payments) is delayed until a future date. This may be as little as several months in the future or as long as many years. During the deferral period, funds accumulate interest on a tax-deferred basis. These funds belong at all times to the contract owner.

On test

-fundamental purpose of an annuity is to distribute a sum of money. All provisions have different ways to pay out offered to the annuitant. -Main difference in annuitys is how the money got in to the annuity in the first place. Deferred annuities or immediate annuty -Deferred annuity -- Main purpose is Long-term Accumulation. reasons to not use it for short-term= 1.Taxable right up front. Last in first out principle. Taxation on gain. 2. additional 10% Penalty (before 59 1/2) 3. Surrender= could extende 7-10 or more years after annuity is issued. -Not that good for seniors to open

Deferred Annuity Premium Payment Options

Deferred annuities may be funded under one of several premium options. This contrasts with immediate annuities, which must be bought with a single premium payment. -Single Premium Deferred Annuity A person can buy a deferred annuity with a single lump-sum payment. This money grows within the contract until the owner accesses the funds or the contract annuitizes. Once a person buys the single premium deferred annuity (SPDA), no additional premium payments are accepted. -Fixed Premium Deferred Annuity At one time, all deferred annuities that were not SPDAs were funded with fixed, level premiums of a specified amount—much like whole life insurance requires fixed premiums. Also called retirement annuities, these fixed premium deferred annuities are still available for those seeking a specific amount of future income. For example, consider the person who wants to receive $500 a month for life when he or she turns 65. A fixed premium annuity specifies the exact premium amount that must be paid for the contract value to grow to the amount needed to produce the desired income amount upon annuitization. The popularity of retirement annuities has decreased in recent decades. Today's annuity buyers generally prefer flexible premium annuities. -Flexible Premium Deferred Annuity Flexible premium deferred annuities allow owners to make premium deposits of any amount whenever they want. However, a certain minimum amount may be required. For example, the insurer may require that each premium deposit be at least $25 or $50. Flexible premium annuities may also require a certain initial minimum premium amount upon purchase, such as $2,000 or $2,500. Beyond those minimum requirements, owners are free to make premium payments in any amount, on any frequency, they desire.

Immediate Annuities

An immediate annuity serves only to distribute income. It is not purchased with accumulation goals in mind. A person who buys an immediate annuity exchanges a lump-sum amount of money for a series of monthly, quarterly, semiannual, or annual income payments. (Regularly distribute income. Person who buys an immeditate annuity exchanges a lump-sum single payment for a series of monthly income payments, it is often referred to as a single premium immediate annuity, or SPIA.) The duration of annuity payments is based on the annuity payment option selected by the owner. An immediate annuity provides a guaranteed stream of income beginning one payment cycle after the annuity is purchased. For example, if periodic payments are to be received monthly, then the first payment is received one month after purchase. If periodic payments are to be received annually, the first payment is made 12 months after purchase.

Bailout Provision

Some deferred annuities include a bailout provision that allows surrender charge-free withdrawals if the interest rate credited to the accumulated value drops below a specified level. This interest rate bailout feature is sometimes called a waiver of penalties provision. Some deferred annuities also permit the contract owner to withdraw funds from the contract at any time, without a surrender charge, if the owner becomes terminally ill or requires long-term nursing care. These are sometimes called medical bailout provisions

Key Points

-A person who buys an immediate annuity exchanges a lump-sum amount of money for a series of monthly, quarterly, semiannual, or annual income payments. -Owner-driven contracts pay the death benefit if the owner dies, while annuitant-driven contracts pay the death benefit if the annuitant dies.

Quiz

You answered 100% of the questions correctly Question 1 What does the length of an annuity's surrender charge period depend on? the amount selected by the owner the age of the beneficiary the contract design and the insurer issuing the contract the age of the annuitant -The contract design and the insurer issuing the contract will decide the surrender charge period. Question 2 Deferred annuities accumulate funds for future distribution. Under what circumstances are these funds forfeitable to the insurer? only at the annuitant's death, if it occurs before the annuity starting date only if the owner is convicted of a felony -under no circumstances only if the owner stops paying premiums Accumulated funds in a deferred annuity always belong to the owner. They are not forfeitable, even if the owner stops making premium payments. Question 3 What must an annuity owner do to withdraw funds from his or her annuity contract? Provide proof of the owner's need for those funds. Pledge a certain amount of collateral, and agree to a repayment schedule. The funds must remain in the contract until annuitization. -Notify the insurer of the request to withdraw funds. An annuity owner who wants to withdraw any values from his or her contract must simply notify the insurer. The insurer cannot withhold these funds or refuse to honor the owner's request. Question 4 Which of the following distributes a sum of money regularly, starting very shortly after they are bought? deferred annuities -immediate annuities life insurance deferred variable annuities Immediate annuities distribute a sum of money regularly, starting very shortly after they are bought. Question 1 Which of the following annuities specifies the exact premium payment amounts (and when they must be paid) for the contract to generate the desired future income payments? deferred annuity immediate annuity -fixed premium deferred annuity flexible premium deferred annuity A fixed premium deferred annuity specifies the exact premium payment amounts (and when they must be paid) for the contract to generate the desired future income payments. Question 2 Which of the following can be funded with a single premium payment, a series of fixed premium payments, or flexible premium payments? single-premium immediate annuities retirement annuities immediate annuities -deferred annuities Deferred annuities can be funded with a single premium payment, a series of fixed premium payments, or with flexible premium payments. Moreover, the owner can make these payments whenever and in whatever amount he or she wants. Question 3 Alice's annuity imposes a declining surrender charge that begins at 7 percent during the first year of the contract and declines 1 percentage point each year. What would the surrender charge rate be for a full withdrawal in the third year of the same contract? 6 percent 3 percent 4 percent -5 percent If a deferred annuity imposes a 7 percent declining surrender charge during the first year of the contract, it would be 6 percent during the second year and 5 percent during the third year. The surrender charge is typically a percentage of the contract's accumulated value and usually declines at 1 percent per year. In the eighth year, the surrender charge period ends. Question 4 All of the following statements about deferred annuity surrender charges are correct, EXCEPT: A surrender charge is a penalty the deferred annuity owner may be required to pay for withdrawing contract values. -The surrender charge typically remains a fixed percentage over the surrender charge period. The surrender charge period is generally limited to a set number of years. The surrender charge is specified in the contract. The surrender charge generally decreases over the term of the surrender charge period, which is a set period following the contract's effective date.