How Do the Deferred Annuity Insurance Plans Work?

Anil Kumar Opt By Anil Kumar Opt, 28th Feb 2018 | Follow this author | RSS Feed | Short URL
Posted in Wikinut>Business>Accounting & Finance

Annuity insurance is known for providing a consistent source of income after retirement and has been much popular for the same. This article explains what a deferred annuity insurance plans are and how do they work?

How Do the Deferred Annuity Insurance Plans Work?

Annuity insurance plans have been working as a great investment option for people who don’t seem to have a consistent source of income in later years of their life. Under these plans, you invest an amount while earning and get the payback after your retirement. Among all the plans offered, deferred annuity insurance is the most popular among the buyers. Let’s get to know more about the same:

Introduction to Deferred Annuity Plan

These are the type of investments where you are investing in present and choose to receive the return of your investment in later years. You are supposed to pay a premium every month and insurance provider will provide a guaranteed income every month after your retirement. Mostly, people choose to invest in this plan to take care of their essential expenses after retirement and spend comfortable life afterward. You can get deferred annuity quotes from multiple providers just by filling an online form on an insurance portal.

Basically, there are two stages in such an annuity plan:

Accumulation Stage: In this phase, you keep depositing your premium consistently to the insurance provider mostly till you reach your retirement.

Payout Stage: This is the phase after retirement when you decide to withdraw the investments you had made till the date to take care of your essential expense after retirement.

Based on the income to be provided, deferred annuities can be divided into two categories:

Fixed Deferred Annuity

Under a fixed deferred annuity plan, you are supposed to pay a fixed annuity to your insurance provider and they will provide with a fixed monthly income, guaranteed in the policy. These plans are considered safer than the variable annuities as you can be assured that you will receive a guaranteed income every month and can plan your expenses accordingly.

Variable Deferred Annuity

Under these plans, a portion of your monthly premium is invested in the market and you can earn a profit as per the market performances. If the market goes up, you can receive an increased income in the next month and depending on the same, it may go down as well. These plans are little risky but are a good option if you have a decent knowledge of market performances.

How Does it work?

When you deposit the funds with an insurer, they open an accumulation account for you and credit the amount to the account. Every month, a fixed rate of interest is credited to the accumulation account. Usually, the insurer sets a specific rate of interest for first 10 years and once the period expires it’s again reset for another 10 years. Most of the deferred annuity plans have a minimum rate of interest that assure that the deposits into the accumulation account should not fall below a certain amount.

Usually, you can withdraw from a retirement annuity plan certain limitations. For a typical deferred annuity plan, the insurer allows one withdrawal every year and you can withdraw an amount up to the 10 percent of the total deposit and if that crosses the decided limit, you will have to pay a surrender charge on the amount exceeded. This surrender charge ranges from 7 to 15 percentage and is higher in initial years. This means you may have to pay 15 percent of deposits as the surrender charge if you exceed the withdrawal limit in the first year. This surrender charge decreases by 1 percent every year and falls up to zero percent, ultimately. Once the surrender period is over, you can withdraw an amount without paying any surrender charges. However, these withdrawals are considered as a part of income and are taxed accordingly. Also, if you make the withdrawals before you reach 59½, you might have to pay a penalty fee of 10 percent as well.

Moreover, annuity insurance plans come with a death benefit that allows the loved ones of the policyholders to receive an amount that is always greater the principal investment made by the insured. Your loved ones can utilize the amount for funeral arrangements, medical expenses, pending debts as well as other essential expenses.


Along with their benefits, these plans have their drawbacks as well:

Cancellation Fee: You would have to pay a hefty amount if you choose to cancel your insurance plan in between.

Moving to Another Institution: Also, it’s difficult to move your accumulated amount to invest in another financial institution.


Annuity Insurance, Annuity Insurance Plans, Deferred Annuity Quotes, Retirement, Retirement Benefits, Retirement Plans

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author avatar Anil Kumar Opt
Anil Kumar is the owner of and has been providing insurance-related support and services to help customers make their most crucial financial decisions.

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