Clarifying Deferred and Immediate Annuities
Annuities, which are essentially investments issued by insurance companies, are among the most complicated I have ever come across. It is possible that a deferred annuity can play a role in your portfolio, but remember, no matter what any insurance agent tells you about deferred annuities in general or one in particular, always read the fine print in the contract or prospectus to be sure you fully understand what you're getting into.
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Fixed Deferred Annuities and Security
Fixed annuities operate much like bank CDs in that they offer guaranteed rates of interest and security of principal. In fact, fixed annuities can sometimes offer higher yields than you'll find on CDs at your local bank. What's more, they have a neat little tax advantage: the interest they pay escapes taxation until you pull it out of the annuity.
Variable Deferred Annuities and Financial Opportunities
Variable annuities function more like mutual funds. They allow you to invest in anywhere from a half dozen to 20 or so stock or bond portfolios known as "subaccounts," many of which are actually modeled on well-known retail funds. As with fixed annuities, the gains in variable annuities are sheltered from taxes until you withdraw them from your account
Issues to Keep in Mind
In the case of fixed deferred annuities, the rate you're quoted is typically good for only one year. After that, the insurance company can set it pretty much wherever it likes, although most annuities do guarantee a minimum annual return of 3 % or so.
Variable deferred annuities often carry burdensome annual fees that can erode the benefit of tax-deferral and drag down returns. And both fixed and variable annuities usually come with surrender charges for early withdrawals that typically start at 7 % but can go to 10 % or higher.
Immediate Annuities and Longevity Insurance
I bought two annuities this year and was extremely satisfied with the service from Immediate Annuities.com each time. In short, their staff was courteous, professional, and prompt. I would recommend them to anyone who wants to buy an annuity.
The immediate, or payout, deferred annuity essentially allows you to convert a lump sum of money into monthly payments that can last for the rest of your life, as long as you or your spouse are alive, or for another agreed-upon period.
There are plenty of choices here too, starting with whether you should choose a monthly payment that's fixed or one that can fluctuate month to month. The fixed payment gives you the assurance of knowing how much you'll get each month but leaves you vulnerable to inflation. The variable payment offers less certainty, but because its value is tied to the stock market, the variable payment can grow over time and increase your purchasing power.