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If you want to purchase an annuity but don't have a lump sum payment, you may want to consider a flexible premium deferred annuity.
There are different types of annuities, such as immediate or deferred. Immediate annuities could begin making payments to you within a year of purchase, while deferred annuities typically don't start to provide you payments for at least a year.
The money you use to purchase an annuity is known as a premium. The two main options for annuity premiums are single, meaning you make a one-time lump-sum payment, or flexible, meaning you make several payments over time.
So, a flexible premium deferred annuity is an annuity that you pay into incrementally over time and that you defer receiving payments from until a later date.
If a flexible premium deferred annuity sounds like it may be a good fit for you, here is some more context into how they work and what you might want to think through before purchasing one.
How Do Deferred Annuities Work?
Immediate annuities are always single premium annuities because they are purchased with a lump sum and begin paying out immediately. Deferred annuities, on the other hand, typically offer you more options; they can be purchased with a lump sum or with multiple payments. This means you can purchase a single premium deferred annuity (SPDA) or a flexible premium deferred annuity (FPDA).
Deferred annuities have two phases: accumulation and payout. In the accumulation phase of a flexible premium deferred annuity, you can make payments over time. The value of the annuity will increase because you're making additional premium payments and there's also potential to earn interest on the money in the annuity over time.
How your funds potentially grow depends on the annuity. A fixed annuity, for example, grows at a fixed interest rate, while a variable annuity allows you to invest your money in subaccounts. With an indexed annuity, the rate of growth is tied to the performance of a market index. The value of the investment in a variable annuity subaccount is subject to changes in market conditions. They may lose value. Variable annuities are long term investments designed for retirement purposes.
If purchasing an annuity with a lump sum payment isn't practical for you, a flexible premium deferred annuity may allow you to make smaller premium payments over a period of time. On the other hand, if you want to use a lump sum to purchase your annuity, a single premium deferred annuity may be right for you.
What Are the Potential Advantages of Flexible Premium Deferred Annuities?
A flexible premium deferred annuity has several potential advantages. They include:
- Lower initial premium: Often, a flexible premium deferred annuity can be purchased with less money than a single premium annuity.
- Capital retention: You can sometimes hold back some of your money that you may need to have access to. Over time, as those needs change, you can put more funds into your annuity.
- Flexibility: You can often pay premiums on your own schedule.
- Potential growth: You could set up a flexible premium deferred annuity when you're younger and make relatively low payments in amounts you won't miss, allowing it to potentially grow over time. As your income increases, you may have the option of making bigger payments.
What Are the Potential Drawbacks of Flexible Premium Deferred Annuities?
There are also some potential drawbacks to flexible premium deferred annuities. For example, your annuity contract may place limits on the amount you can contribute. Also, if you fail to make premium payments, your annuity could have limited growth. This may make flexible premium deferred annuities a better choice for people who have a significant amount of time before reaching retirement age.
After you purchase a flexible premium deferred annuity, you will have to pay surrender charges if you terminate the contract during the surrender charge period. You'll also have to pay a 10% early withdrawal penalty on top of paying ordinary income tax if you're under age 59 1/2.
There are different types of annuities and the one that's right for you will depend on your unique needs. For more information, consider contacting a financial representative to discuss your options.