What is a Deferred Annuity?

Being an investor in a modern world can prove to be daunting task to many. Today’s investor is confronted by many options ranging from stock markets to bonds and mutual funds. However, most of the time investors are interested in an investment vehicle that not only safeguards their capital or principal amount but also earns them some decent returns. If you, too, are looking for a product that can provide you with a steady income and ensure the safety of your capital, then you can safely consider investing in annuities.

Annuities are insurance products offered by qualified legal reserve life insurance companies. Annuities offer the investor a regular stream of income in lieu of the premium paid by them. There are different kinds of annuities and each annuity has its own distinguishing features. Thus, annuities are able to cater to the needs of all the investors.

Deferred annuity is a popular annuity among many investors. According to MetLife, ‘a deferred annuity is a type of long-term personal retirement account designed to help grow your assets, and provide a steady income stream once you are retired.’ In case of a deferred annuity, the annuitant does not receive the income immediately, but at a future date, which is mutually decided by both the investor and the issuing insurance company.

Features of Deferred Annuity:

Income at a future date: In case of a deferred annuity, the annuitant starts receiving the income at a future date. Insurance companies allow annuitants to choose the period from when they would like to start receiving the income.
Retirement nest egg: Deferred annuity can be used for building a retirement nest egg. Since, the income will become payable at a future date, you can choose to receive the payments once you retire.
Tax deference: This is another important feature associated with a deferred annuity. Tax deference implies that no taxes are due on the gains made by the annuity policy. Tax is only payable once you start receiving payouts from the annuity policy.
Long term investment: Many people view deferred annuity as a long-term investment. And hence, you are able to reap the benefits associated with long-term investments such as better returns and averaging out of risks.

Types of deferred annuity:

Fixed deferred annuity: As the name suggests, fixed deferred annuity provides the investor with a fixed rate of return. The rate of return is determined by the investment period, premium amount as well as the prevailing interest rate conditions. Fixed deferred annuity is suited for the risk-averse investor. Experts state that fixed deferred annuities should be opted by those who are closer to retirement.
Variable deferred annuity: Variable deferred annuity invests in stock markets and mutual funds. Thus, the returns from a variable deferred annuity tend to reflect the gains and losses made in a stock market. Variable deferred annuities are suitable for young, working professionals who tend to stay invested for a long time. These annuities allow one to benefit from a rising stock markets. They also tend to outperform fixed deferred annuities, as far as returns are concerned. However, variable deferred annuities are more risky than fixed deferred annuities.

Deferred annuity is a long-term investment product that is suitable for those who are interested in building their retirement nest egg.

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