Annuities are becoming a very popular investment option. They provide a huge array of option and benefits, one of the options being Deferred Annuity. It came into being in the 1970s. It is a contract between the annuitant and the annuity provider which allows the annuitant to accumulate all the savings and distribute them eventually either as immediate annuity or as a lump sum payment.
There are several kinds of deferred annuities that can be owned by individuals. But all of them have one feature in common—-tax deferment. Until the accumulated amount is withdrawn by the beneficiary, no tax is levied. For this reason it is also called Tax deferred growth.
There are two types of deferred annuities—-Fixed and Variable. Fixed annuity grows only with interest rate earnings. It provides some kind of a guarantee and is in a way similar to Bank CDs as their return rates are comparable. Many fixed annuities do not offer a fixed return rate; rather they guarantee a minimum rate along with an introductory rate for the first year. After the first year the rate will be set as per the wishes of the insurance company. But the annuitant usually receives a permission to withdraw a part of the amount without having to pay any penalty which is not the case with the Bank CDs. Fixed annuities can be withdrawn completely after the death of the annuitant or on surrendering. These products are usually dependent on a stock market index.
A Variable annuity, on the other hand, allows the amount to be allocated to stock or bond funds. It is, therefore, similar to the mutual funds except for the tax-deferment. They offer the investor a greater amount of money than offered by the individual retirement plans without having to pay the taxes. They also provide the investor a minimum rate of return even if the bonds or stocks have a poor performance. So, they are favored by people who are not comfortable taking risks regarding investment.
A lot of benefits and features are provided by the financial institution to make these plans more attractive. Even though everything seems to be a benefit with these annuities schemes, it is not so. Each feature has to be paid for by the investor, either directly or indirectly. Individuals generally procure deferred annuities from agents who are not directly employed by the investment company. They are paid a commission on the basis of the total premium paid by the investor. This commission is recovered from the investor which increases the back-end charges.
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