Annuities are financial products that provide a stream of income over a specified period of time or for the lifetime of the annuitant. There are two main types of annuities: immediate annuities and deferred annuities. Immediate annuities start paying out income within a year of the purchase date, while deferred annuities allow for a period of accumulation where the annuitant’s funds are invested, and income payments are deferred to a future date.

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Both types of annuities offer different benefits and drawbacks, and the choice between them depends on the individual’s goals, financial situation, and retirement planning needs. It’s important to consider factors such as age, investment goals, and risk tolerance before deciding between an immediate or deferred annuity.

Moreover, both immediate and deferred annuities can be purchased as a fixed rate of return or as an indexed annuity.


What is an Immediate Annuity?

An immediate annuity is a type of annuity contract where the payment to the annuitant starts within one year of the purchase date. The annuitant makes a lump-sum payment to the insurer and in exchange, the insurer provides a guaranteed stream of income payments for a specific period of time or for the lifetime of the annuitant.

An immediate annuity is often used for retirement income planning. The payments from an immediate annuity can provide a steady source of income during retirement and can help with budgeting and financial planning. The amount of the payments is based on factors such as the annuitant’s age, the amount of the lump-sum payment, and the interest rate at the time of purchase.

There are different types of immediate annuities, including fixed and indexed annuities, and annuities with guaranteed payment periods. The terms and conditions of each type of immediate annuity vary, so it is important to understand the specifics of each before making a decision to purchase.


What is a Deferred Annuity?

A deferred annuity is a type of annuity contract where the income payments are postponed to a future date. The annuitant purchaser) makes contributions to the annuity, which are invested and grow tax-deferred. The accumulation period allows the funds to grow over time, and the income payments are not received until a later date, typically during retirement.

 There are different types of deferred annuities, including fixed, variable, and indexed annuities, each with its own features and benefits. Deferred annuities are commonly used for retirement planning, but can also be used for other financial planning goals.


What’s the Difference between a Fixed and Indexed Annuity?

Fixed annuities and indexed annuities are both annuities. The primary difference between them is how the funds grow during the accumulation period:

Fixed annuities: The insurance company provides a guaranteed minimum interest rate, and the funds grow based on the fixed interest rate offered by the insurer. The interest rate is set in advance and does not fluctuate with market conditions.
Indexed annuities: The growth of the funds are tied to a stock market index, such as the S&P 500. The returns are based on the performance of the index, but with a cap or participation rate that limits the amount of potential gain.

Fixed annuities offer stability and a guaranteed minimum return, but often have a lower potential for growth compared to indexed annuities. Indexed annuities offer the potential for higher returns based on stock market performance, but also come with greater risk. The choice between a fixed or indexed annuity depends on an individual’s investment goals, risk tolerance, and financial situation. 


Can I lose money Investing in an Immediate or Deferred Annuity?


In general, immediate annuities provide a guaranteed stream of income payments and the annuitant cannot lose their original premium. The payments are based on factors such as the annuitant’s age, the premium amount, and interest rates, and are not subject to market fluctuations.

With deferred annuities, there is a risk of loss if the annuitant withdraws funds before the maturity date, and there may be fees and charges for early withdrawal. The funds in a deferred annuity grow through investments, and the value of the annuity can go up or down based on the performance of those investments.

It is essential to understand the specific terms and conditions of each type of annuity, including any fees, charges, and restrictions on withdrawals, before making a decision to purchase.

Moreover, even though your annuity cannot lose money, the insurer will continue to charge for administrative fees, optional rider costs, and other expenses that are listed below:

Sales charges or commissions: This is a fee paid to the insurance agent or broker for selling the annuity.
Mortality and expense risk charges: This is a fee to cover the insurance company’s cost of providing the annuity and to cover the risk of death of the annuitant.
Administrative fees: This fee covers the cost of managing and administering the annuity contract.
Surrender charges: If the annuitant withdraws funds from the annuity before a specified date, a surrender charge may apply.
Management fees: This fee covers the cost of managing investments in a variable or indexed annuity.
Death benefit charges: This fee is charged in some annuities to provide a death benefit to the annuitant’s beneficiaries.

The specific fees and charges vary depending on the type of annuity and the terms of the contract, so it is important to carefully review the fee schedule and understand the fees associated with the annuity before making a decision to purchase.


How to Customize Your Annuity to Meet Your Specific Needs

Most insurance and annuity companies offer various optional riders that you can purchase for additional benefits:

Guaranteed minimum withdrawal benefit (GMWB): This rider guarantees a minimum withdrawal amount for the annuitant. This means that, even if the underlying investments in the annuity perform poorly, the annuitant is guaranteed to receive a certain minimum amount of income from the annuity during the withdrawal phase. The GMWB provides a safety net for annuitants and helps to ensure that they do not outlive their savings.
Guaranteed minimum income benefit (GMIB) This rider guarantees a minimum level of income to the annuitant for life, regardless of the performance of the underlying investments. This provides the annuitant with a stable and predictable stream of income during retirement, helping to ensure that they do not outlive their savings.
Guaranteed minimum accumulation benefit (GMAB): For annuitants desiring added protection against market fluctuations, a guaranteed minimum accumulation benefit (GMAB) rider offers a solution. This optional add-on feature ensures that after an accumulation or other established period, some value is paid out to them. Thus, GMAB helps shield account holders from unpredictable changes in economic conditions.
Death benefit: Your death benefit rider will protect your beneficiary(s) against any decline in your contract value due to unfavorable market conditions.
Long-term care benefit: By adding a long-term care rider onto an annuity contract, you can receive assistance to cover unexpected long-term care costs. You have instant eligibility for this benefit and should you not use it, you can pass it on to whomever you wish as part of your estate.
Cost of living adjustment (COLA): The COLA rider is an add-on to an annuity contract that adjusts the payment amount based on changes in the cost of living, as measured by the Consumer Price Index (CPI). This means the annuity payment will increase over time to keep up with inflation.
Terminal illness benefit: By adding the benefit, an annuitant that’s been diagnosed with a terminal illness may choose to receive an amount equal to their death benefit value to use in any way they’d choose.
Income rider: An annuity income rider is an optional feature that can be added to an annuity. It allows the annuitant to receive a steady stream of income payments, typically for the rest of their life, in exchange for a portion of their death benefit. The payments are calculated based on the policyholder’s age, gender, and interest rate.

The optional riders that will be available for you will depend on the insurance/annuity company you choose and the type of annuity you purchase.


The Bottom Line

Generally speaking, investing in annuities is a solid solution for accumulating wealth for retirement. Part of your decision whether to purchase an annuity should also be based on your expected tax liability when the time comes to start receiving your income. Knowing this, we encourage you to contact the team at so you can take advantage of good financial advice from an experienced professional.

You can reach us during working hours at 866-868-0099 or contact us through our website at your convenience.

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Frequently Asked Questions

What is a single premium deferred annuity?

A Single Premium Deferred Annuity (SPDA) is an annuity contract purchased with a single lump sum payment. The annuitant can elect to start receiving payments immediately or defer taking them until a later date.


What is an immediate annuity?

An immediate annuity is purchased with a single payment so the annuitant can start taking payment right away,


Are annuities tax deferred?

Yes. Your contributions in your annuity earn tax-deferred interest but you will begin paying income taxes when you start receiving income from the annuity.


What happens if a deferred annuity is surrendered?

If you surrender your annuity early, it will trigger the taxes that has been deferred up until that point. Possible exceptions for annuity surrender charges include death benefits, nursing home admission, and terminal illness.


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