3 Things To Know About Deferred Annuity Rates

Deferred annuity rates are rates at which you are paid from your deferred annuity. Like other types of annuities, deferred annuity is a financial contract in form of an insurance product.  Under its terms, you buy the annuity from an insurance company, paying either in lump sum or in several increments. The insurance company then holds onto the money either until you reach a certain age or until the end of the certain time period. At that point, it will begin depositing monthly payments in your account until the day you die. Many people choose to buy deferred annuities in order to ensure a steady stream of income when they retire. However, it may not be right for you. Before deciding whether or not you want to buy an annuity, there are a couple of things that you should know.

How Deferred Annuity Rates Work

Before choosing a deferred annuity, you must examine its rates. You want to find an annuity with the biggest rates is possible. You should look into how those rates are determined. The deferred annuity rates can be divided into two types:

  • Fixed annuity rates - these rates either remain the same over time or increase at a constant rate. If the economy is in trouble, fixed annuity rates are better than variable. The fact that you will know exactly what you get every month can give you a certain measure of financial security.
  • Variable annuity rates - these rates go up and down based on international financial trends. Annuities with variable rates can be put into investment accounts that can yield even more profit. If the economy is doing well, you will earn more money from variable rates

As our recent history has shown, it is nearly impossible to predict what the economy will look in the next few years, let alone decades from now. Ultimately, the choice come down to whatever you are comfortable with the most.

Benefits of Deferred Annuities

One of the biggest benefits of deferred fixed annuities is that once you place the money in the annuity, it becomes tax-free.  Furthermore, because of the interest rates, their value will increase every year with compounded interest. Deferred annuities allow you to save more money than you would otherwise be able to. 

Another major benefit of deferred annuities is their stability. Unless the insurance company suffers a financial collapse, your annuity will be secure. You can further insure the security of your annuity by buying it from an insurance company with financial ratings that are rated "A" or higher.

Disadvantages of Deferred Annuities

While the money in the annuity remains tax-free before the payments begin, you will have to pay taxes on it once you start getting the payments. These payments are not considered capital gains, so it will be taxed the same way as any other income. Furthermore, the federal laws stipulate that if you withdraw any money while you are less than 60 years old, you will have to pay a penalty equal to 10% of your income tax.

Another significant disadvantage is that the insurance companies will charge you a variety of management fees as long as you own an annuity. The fees are deducted directly from the annuity every year. They are usually fairly substantial, reaching as high as 2.35%. If you have your fixed annuity for less than a year, you have a right to change your mind and sell it back to the insurance company. However, you will be charged a fee that ranges from 2-8%. In most cases, the fee tends to fall in the upper portion of the spectrum.

Finally, if you decide to pass on your annuity to someone once you die, your heirs will be taxed on any profit earned or whatever is left of the annuity.

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