Fixed Deferred Annuity Contracts Offer Delayed Income
Fixed annuity contracts can more or less be filtered into two distinct categories, immediate and deferred. Both types of contract have some very divergent characteristics and can be used in a number of different financial planning strategies. Fixed annuities are an item that few people really understand, despite the inherit simplicity of the underlying concept.
The simplest form of annuity is the immediate annuity. As with other annuity contracts, this type of annuity is a contractual agreement between an insurance company and an individual. The insurance company is selling a stream of income payments for a price or premium payment. For example, an insurance company may offer a fixed stream of income payments to the owner for a period of 5 years. In order to buy this stream of income, the annuity owner would purchase it for a lump sum payment to the company. The premium rate is based on size of the income payments, duration of the payments, and a number of other factors. The distinguishing feature of an immediate annuity is that the payments begin almost as soon as the contract is started. Technically, the distributions begin one period from the time of purchase.
A fixed deferred annuity is somewhat different than an immediate annuity. As the name implies, the distribution payments back to the account’s beneficiary do not begin immediately, but are deferred until a later date. This date is predetermined at the time of contract, and can be designed to provide income at a date that it is needed by the investor. This type of deferred payments is often used in retirement planning or other fixed income situations.
The deferred annuity has more funding options than immediate annuities do. In addition to the option to fund the annuity in a lump-sum payment, the contract can often be paid with a series of premium payments. Again, this structure is predetermined and contracted for at the creation of the contract. For those with a delayed income need, a fixed deferred annuity may be an excellent option.
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