An annuity is a contract between an individual, often called annuitant and his insurer. According to this contract, the individual deposits money in an insurance company that takes the responsibility to distribute the deposited money for a specified period of time. The income distribution continues till the death of the annuity owner or the final date. Of a variety of annuities to meet diverse needs of the individuals, the deferred annuity is the most preferred choice.


An annuity of deferred type provides the annuitants with an opportunity of piling up their savings in order to secure a guaranteed distribution of income either as a lump sum or as an immediate payment. A deferred annuity can be of two different kinds. Fixed type grows due to the accumulation of interest over time. The other category refers to an annuity that allows allocation to bond or stock fund. Another type of deferred annuity, known as fixed indexed annuity has the combined features of both the fixed and variable annuities. Though a minimum return is guaranteed in fixed indexed annuity still loss may be incurred in the event of early cancellation of policy.


The prime benefit to purchase a fixed deferred annuity is the annuitants will enjoy a guaranteed rate of return over a specific period as per as the contract. However all the fixed annuities do not provide the return over the life of the contract, instead the annuitants get the minimum guaranteed rate along with an introductory rate in the first year. The rate of return after the first year may significantly vary from the initial rate and this rate setting is at completely the insurance company's discretion. Fixed deferred annuity contract may include an important provision that permits the individuals for early withdrawal of money without penalty. After the death of the annuitant, the fixed annuity becomes completely liquid. Such conversion into a liquid asset may also happen depending upon the surrender schedule of an annuity owner. The majority of the equity index annuities are treated as fixed category. The ups and downs in the stock exchange index have a greater impact upon the performance of such annuities. But unlike the fixed annuity, the equity index deferred annuity can make a reduction in return by placing caps, margins, spreads etc.


From the perspective of functioning, the variable annuities are similar to the mutual funds. The annuity owners invest money in the separate accounts, known to be sub-accounts, of the insurance companies. This category of deferred annuity encourages the individuals to enjoy the tax deferred growth of their initial investment. The tax deferred annuity permits the individuals to defer the taxation of the capital gains until they are withdrawn. This facility allows greater accumulation of saving. The disadvantage of such deferred annuity is that the income is subject to taxation as soon as it is withdrawn. Some variable annuities promise to spurt out a minimum rate of return. Such facility is really appealing to the individuals who are unwilling to purchase an annuity with no guarantee. But in such a variable deferred annuity program, the investors are required to pay premium for every benefit they gain from the insurer.

About the author

Brad Lassy is a business consultant who has good information on tax deferred annuity and deferred annuity. For more information visit http://www.immediateannuities.com/.

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