Deferred Annuities Explained

Christian Worstell
In this article...
  • Discover the pros and cons of deferred annuities, including surrender charges and withdrawal fees. Learn if a variable or fixed deferred annuity is a good investment for you.

Are you considering a deferred annuity for your retirement planning? It's important to understand the different types of deferred annuities, their surrender charges and withdrawal fees, how long they are paid out and the pros and cons associated with them.

Let's dive into the details of deferred annuities to help you decide a deferred annuity contract right for your financial objectives.

Table of Contents:

What Is a Deferred Annuity?

A deferred annuity is a form of insurance product which allows the annuity owner to accumulate savings for retirement, with the option to receive payments at a later point. It’s a great way to ensure financial security in your golden years, as it provides you with a steady stream of income when the time comes.

Before signing up for any kind of indexed annuities, be aware that withdrawals made before age 59½ may incur taxes and penalty fees imposed by IRS regulations.

The length of your payout phase depends largely on when you begin taking distributions from your policy. Most plans allow for flexible payout options such as monthly installments or annual payouts over multiple decades if desired, depending on what works best for your situation financially.

Some indexed annuities offer death benefits, which can be a nice feature if an account holder wants to add safe income protection for named beneficiaries.

When considering whether or not a deferred annuity is right for you it’s important to weigh both pros and cons carefully before making any financial decisions.

  • On one hand, a deferred annuity provides financial growth on a tax-deferred basis with potential income guarantees and protection against market losses.

  • Deferred annuities, however, require a significant upfront capital investment which might not be feasible for all investors. Surrender charges and withdrawal fees can also apply, so those should be taken into consideration.
Key Takeaway: Deferred annuities are a great way to ensure financial security and retirement income, providing a guaranteed rate of income and tax-deferred growth opportunities. However, they require significant upfront capital investment and come with a surrender fee or withdrawal fees, so it's important to weigh the pros and cons before committing.

Types of Deferred Annuities

Deferred annuities come in two main types: a deferred fixed annuity and a variable deferred annuity.

  • Fixed deferred annuities are typically offered by life insurance companies and provide a guaranteed rate of return over time. With this type of annuity, you can choose from several different payment options depending on your needs and goals.

    You can opt for regular monthly payments or one lump sum payout phase upon the annuity contract maturity date. Your investment return may depend on your insurance contract duration, but these investments can typically provide higher yields than regular savings accounts and some mutual funds or CDs.

  • Variable deferred annuities are more complex products that involve investing in stocks, bonds, mutual funds and other securities within an account structure provided by the insurer.

    A variable deferred annuity offers higher potential returns than a deferred fixed annuity, but there is no guarantee on how much money you may make. Variable annuities also carry greater risk since investments could lose value if markets decline significantly over time.

Fixed deferred annuities guarantee the principal investment plus a set interest rate over time, regardless of market conditions or changes in interest rates. Fixed deferred annuities present a low-risk option, but they are not as profitable as other investments.

Variable deferred annuities provide more potential for growth because they invest in stocks and bonds rather than simply providing a guaranteed income stream for a set deferral period. These investment accounts carry more risk, however this risk may be worth taking depending on an individual's financial goals and timeline for retirement savings.

Deferred annuities can be a beneficial way to plan for retirement, but it is critical to consider the related costs and charges that may arise as you make your financial decisions.

Surrender Charges & Withdrawal Fees

Surrender charges and withdrawal fees are two important factors to consider when considering deferred or fixed annuities.

  • Surrender charges are penalties charged by the insurance company if the annuity owner withdraws money from the annuity before it matures.

  • Withdrawal fees refer to any costs associated with taking out funds from your annuity account.

Surrender fees can vary greatly depending on the type of annuity purchased, the length of the insurance contract and the insurance company who issued your annuity.

Generally speaking, surrender charges tend to be higher during the first few years of an annuity's life span but decrease over time as more premiums are paid into the policy.

For example, a fixed index annuity may have a 10% surrender charge in the initial year, diminishing to 5% in a later year then 3% later on.

It is important to note that some types of deferred annuities may not have any surrender charges at all, while others may come with hefty penalties for withdrawals before your maturity date. Make sure you understand what type of penalty you could face should you need access to your money before maturity.

Withdrawal fees also vary widely depending on the type of product purchased and typically range anywhere from 0-2%. Some policies may even waive these fees altogether if certain conditions are met, such as holding onto the policy for a minimum number of years or making regular contributions over time instead of lump sums up front.

Make sure you know exactly what kind of withdrawal fee structure is associated with your particular policy before signing up so there aren’t any surprises at a future date when trying to access your funds prematurely.

Key Takeaway: It's essential to understand the surrender charges and withdrawal fees of a deferred annuity, as these costs can take a hefty chunk out of your profits when it comes time to cash in. Do your research prior to investing in a deferred annuity, so you don't have any unforeseen costs when it comes time to redeem.

Length of Payment

The extent of the payment for a postponed annuity is reliant on the sort of annuity bought and its agreement provisions.

  • A fixed deferred annuity provides guaranteed payments over a set period, usually lasting between five and twenty years. With this type of annuity, you will receive regular payments that remain constant throughout your contract term.

  • Variable deferred annuities offer more flexibility in terms of length of payment because they are based on market performance. Income streams from variable deferred annuities can vary, depending on the investment performance over the length of your contract period. This could be anything from one to thirty years or even longer, as per provider regulations.

Immediate deferred annuities provide an immediate stream of income after purchase but with no guarantee as to how long it will last since it depends largely upon how much money you have invested in them. These types of contracts typically last until all funds have been withdrawn or until death occurs, whichever comes first.

There are also flexible premium deferred annuities which allow investors to make multiple deposits over time while still receiving regular payouts when their contracts mature, usually within five to fifteen years depending on their policy’s terms and conditions.

Unlike traditional IRAs or 401(k)s, flexible premium deferred annuities give the annuity owner the ability to decide when and how much money they want to invest at any given time without needing to make a large upfront payment.

The point when a deferred annuity payout phase begins may differ based on the insurance company and the contract terms. Make sure you weigh the benefits and drawbacks of a deferred annuity and consider working with financial advisors as you make life insurance and personal finance decisions.

Key Takeaway: Deferred annuities offer varying terms and conditions depending on the type chosen, ranging from fixed to variable payments over a period of five to thirty years or more. Flexible premium deferred annuities allow for multiple deposits while still receiving regular payouts when contracts mature. You should decide which type of annuity best suits your needs.

Pros & Cons of Deferred Annuities

Deferred annuities can be a great way to save for retirement and provide growth on a tax-deferred basis. Still, certain limitations should be taken into account prior to investing in a deferred annuity.

  • Pros of deferred annuities
    One of the main advantages of deferred annuities is that cash stored in a deferred annuity can grow in accumulated interest without being taxed until the maturity date or you withdraw funds.

    Additionally, many deferred annuities also come with an option for guaranteed lifetime income payments so you can rest assured knowing that you’ll have a steady stream of income well into retirement age. This makes them a popular component of retirement plans.

  • Cons of deferred annuities
    One downside to deferred annuities is they often come with high fees and surrender charges if you decide to take out money early or switch providers. Also, most plans require minimum deposits or premium payments which may not fit within everyone’s budget or investment goals.

    Some states may require an account holder to pay taxes on any gains earned through a deferred annuity plan, which could further reduce potential returns on investments made through these plans.

In summary, while a deferred annuity may offer tax deferral and may offer guaranteed rates, it is important to weigh all the risks prior to investing.

Deferred Annuity FAQs

Are Deferred Annuities a Good Idea?

Deferred annuities offer growth for which you don't pay income taxes until the account matures or you withdraw funds. This can allow you to benefit from compound interest.

They also provide income in retirement and offer guaranteed rates, which can help ensure that your money lasts throughout your lifetime. Be sure to get your retirement plan financially reviewed by knowledgeable financial advisors who can assess if a deferred annuity would be beneficial for you.

Why Is a Deferred Annuity a Good Investment?

Deferred annuities provide a steady growth rate that can provide income throughout retirement and help protect against market volatility. Deferred annuities offer tax-deferral on earnings until you withdraw funds at a future date, allowing the investor to benefit from compound growth over time.

What Is a Real Life Example of a Deferred Annuity?

A deferred annuity is a form of insurance that enables an individual to build up savings for their retirement through time. The funds are invested and grow tax-deferred until the owner decides to begin receiving payments, usually at or after age 59 1/2.

Annuity payouts may be obtained either in one go (lump sum) or as periodic installments. Deferred annuities provide flexibility and security when planning for retirement income needs.


However, prior to investing in a deferred annuity, it is essential to be aware of the different varieties accessible, any associated fees and withdrawal regulations, as well as advantages or drawbacks. By doing your research and understanding all aspects of a deferred annuity you will be better prepared when making an informed decision on whether this type of investment product is right for you.

Discover how government benefits programs can help you age with financial security and good health. Take advantage of deferred annuity options to maximize your retirement savings.

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at

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