Immediate vs. Deferred Annuities Quiz

Study Notes

Immediate vs. Deferred Annuities

Annuities involve an accumulation period, which can vary from a month to many years.
Immediate annuities provide periodic payments right after a lump-sum purchase.
Deferred annuities require a wait for annuity payments, which can begin years later.

Immediate Annuities

Goal: To distribute income rather than accumulate funds.
Involves exchanging a lump-sum payment for regular income, referred to as a single premium immediate annuity (SPIA).
Payments commence after one payment cycle, depending on the chosen frequency (monthly, quarterly, etc.).

Deferred Annuities

Annuitization is postponed for a future date, allowing time for fund accumulation.
Interest on the funds accumulates tax-deferred during the deferral period.
Ownership of funds remains with the contract owner at all times.

Deferred Annuity Premium Payment Options

Single Premium Deferred Annuity: Funded with a single lump-sum, with no additional payments allowed post-purchase.
Fixed Premium Deferred Annuity: Purchaser makes fixed level premium payments over time, often specified like whole life insurance.
Flexible Premium Deferred Annuity: Allows deposits of any amount, subject to a minimum requirement.

Deferred Annuity Values Are Nonforfeitable

The owner retains rights to the accumulated funds regardless of premium payment status.
Owners can withdraw or surrender values without the risk of losing their investment.
Withdrawal requests can be made at any time, and insurers are obligated to honor them.

Deferred Annuity Surrender Charges

Surrender charges apply for early withdrawals within a specific period, typically between 5 to 10 years.
Charges often decline over time (e.g., 7% for 3 years, then reduced percentages).
The duration of the surrender charge period varies based on contract terms and may exceed ten years.

Bailout Provision

Some deferred annuities feature a bailout provision for penalty-free withdrawals if interest rates drop below a set level.
Other provisions may allow penalty-free withdrawals in cases of terminal illness or the need for long-term care.

Deferred Annuity Death Benefits

Death benefits are paid to beneficiaries if the contract owner or annuitant passes away during the accumulation phase.
Payment can differ based on whether the contract is owner-driven or annuitant-driven.
The death benefit amount depends on the fund's accumulation method (fixed or variable rates).

Key Points

Immediate annuities trade a lump sum for regular income distributions.
Owner-driven contracts pay benefits on the owner's death; annuitant-driven contracts on the annuitant's death.

Annuity Examination Insights

The primary role of an annuity is to distribute funds over time.
Understanding annuity types (immediate vs. deferred) is crucial, particularly for tax and withdrawal implications.
Deferred annuities serve long-term accumulation purposes, less useful for short-term investment strategies.

Description

Test your knowledge of immediate and deferred annuities with this quiz. Understand the differences in accumulation periods and how they are structured financially. Learn key terms and concepts related to these types of annuities.