A deferred annuity grows tax deferred until the contract is annuitized (put into a payment stream) or surrendered (paid out as a lump sum).
This type of annuity is a vehicle for accumulating savings for a future goal, such as retirement, and eventually distributing the value. The increase in account value is not taxed until those gains are withdrawn or paid out.
Tax-Deferred Interest Accelerates Growth
All deferred annuities have the same advantage: the earnings are not taxed until you withdraw them. Another benefit is the effect of "triple-compounding" because the account will earn interest on:
- Principal (the premium you paid),
- Interest (the amount that's credited to your account based on the contract interest rate), and
- Unpaid taxes (the amount that, without deferral, is paid annually)
Example:
$100,000 Investments, Both Earning 4% Interest
| Taxable Investment | Tax-Deferred Annuity | |
|---|---|---|
| Year 1 | $102,880 | $104,000 |
| Year 2 | $105,843 | $108,160 |
| Year 3 | $108,891 | $112,486 |
| Year 4 | $112,027 | $116,986 |
| Year 5 | $115,254 | $121,665 |
| Year 6 | $118,573 | $126,532 |
| Year 7 | $121,988 | $131,593 |
| Year 8 | $125,501 | $136,857 |
| Year 9 | $129,116 | $142,331 |
| Year 10 | $132,834 | $148,024 |
This example is hypothetical and for illustrative purposes only. This chart assumes that interest is credited daily and that earnings from the taxable investment are taxed annually at 28 percent. Earnings from the tax-deferred annuity are not taxed until withdrawal.
Fixed-Rate Annuities
A fixed annuity guarantees to pay a specified interest rate that is based on the current economic environment.
The initial rate is guaranteed for one or more years and subsequent renewal rates are guaranteed to stay above a specified minimum rate. Because it provides several guarantees, a fixed annuity is viewed as a conservative financial product.
Traditional, fixed-rate annuities credit interest to your account daily.
Fixed-rate annuities:
- Start by earning a fixed interest rate for a set amount of time
- Will earn a renewal rate after the guarantee period
- Always include a minimum rate
Index-Rate Annuities
An index annuity is a special type of fixed annuity in which the interest rate is determined in part by reference to an investment-based index, such as a Standard & Poor’s 500® index or a NASDAQ index.
As interest is credited, the earnings are locked in to the account value. Additionally, the account will not participate in any losses the index may see. An index annuity offers the ability to participate in some gains associated with a rising financial market while at the same time providing the security and guarantees similar to those associated with traditional fixed annuities.
Index-rate annuities:
- Index-based interest up to the initial rate cap
- Will be assigned a renewal cap rate after the guarantee period
- Always include a minimum cap rate
Surrenders
You may surrender a deferred annuity to receive a lump-sum payment of the account's value.
Most annuities have a surrender period, after which you may withdraw money at no charge. Generally, withdrawals during the surrender period are subject to charges based on several factors including the account value and the number of years remaining.
Surrender-Charge Free Withdrawal Options
Our deferred annuities offer several ways to withdraw funds during the surrender period without terminating the contract or incurring surrender charges.
These options vary by annuity, but may include:
- 10 percent annual withdrawals
- Payments of interest earnings
- Waivers for certain medical conditions
- IRS required minimum distributions
- Substantially equal periodic payments
Annuitization
In most states, you may exchange your deferred annuity at any time for an annuity that generates guaranteed income payments.
Deferred annuities are purchased with either a single premium or multiple premium payments.