Immediate and Deferred Annuities

Annuities fall into one of two general categories, based on when the annuity's payments are scheduled to begin. These categories are immediate- and deferred annuities. A contract is designated as an immediate annuity if income payments to the annuitant are scheduled to begin one payout interval (for instance, one month or one year) after the purchase date of the annuity. The contract is called a deferred annuity if income payments are to begin at some further point in the future – perhaps as much as several years from the date of purchase.

In the case of immediate annuities, the naming has often caused confusion. It should therefore be remembered that although the contract is called an immediate annuity, payments don't begin on the very next day after the contract is purchased. Instead, payments begin after one full payment period has elapsed following the date of purchase. For example, if the contract calls for monthly installments, payments will begin one month after the date of purchase. If the contract stipulates that annual payments will be made, the annuitant will receive the first payment one year after the purchase date of the annuity.

Annuity benefit payments are made on either a monthly, quarterly, semiannual, or annual basis. Since the longest period between benefit payments is one year, it naturally follows that payments from an immediate annuity will begin no later than one year from the date of purchase. By the same token, payments could also begin as soon as one month from the annuity's purchase date. Therefore, the point to remember is this: an immediate annuity is "immediate" only in relation to a deferred annuity, in which the first payment is deferred by as much as several years.

Additionally, it must be mentioned that if the insurance company is to begin paying the annuitant shortly after the purchase of the contract, the purchaser must pay for the entire contract all at once. An immediate annuity, then, must be paid for with a single premium and is commonly known as a single premium immediate annuity (SPIA). (Well-to-do individuals with high incomes often purchase this type of contract while their means allow them to do so.) A deferred annuity, on the other hand, may be either a single premium contract or a single premium deferred annuity (SPDA).

On some occasions annuity payments will not begin until many years after the first premium is paid (or only premium, in the case of single premium annuities). These contracts are known as deferred annuities, because the benefits are not rendered immediate but are delayed until some specified future time. This deferral period not only allows a deferred annuity to be used as an accumulation vehicle during the annuitant's working years but also as well as a source of lifetime income after retirement. Deferred annuity premiums are usually paid in monthly, quarterly, semiannual, or annual installments over a number of years. The start of income payments is delayed for a specified period of time – for instance, until the annuitant reaches age 55, 60, or 70.

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