Deferred Annuity: What, Why and Who Should Care

Hi, I'm Stan The Annuity Man, America's annuity agent, licensed in all 50 states. We're here today to talk about Deferred Annuities. What are they? When should you consider them? Who should buy one? These are very good questions, and we're going to go through the details. By the end of this blog, you may decide that a Deferred Annuity isn't right for you, but we still need to cover what they are. You're talking to the nation's number one agent, licensed in all 50 states, including yours, and we're going to dive into these details.

What Is a Deferred Annuity?

Let’s talk about Deferred Annuities. What is a Deferred Annuity? You can’t say you hate all annuities because there are numerous types of Deferred Annuities. There are Fixed Indexed Annuities, Multi-Year Guarantee Annuities, Variable Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts. That’s a lot, right? So, how do you know if you need one? Don’t listen to your agent—they're going to tell you that you need one. You might not need one, but how do you determine it? Two questions. Remember these?

1. What do you want the money to contractually do?
2. When do you want those contractual guarantees to start?

That's it. So, if you say, "Hey, I need market growth, and I need it to happen," you don’t need an annuity.

The Basics of Annuities

Annuities are contracts. Remember that. They were first developed in Roman times to create lifetime income streams. Annuities have a monopoly on the lifetime income stream market. They're the only product on the planet that provides a lifetime income stream. Now, let's talk about the category of Deferred Annuities. Remember, there are many types, but what are the Deferred Annuities that just do income?

Types of Deferred Annuities

Deferred Income Annuities

First, a Deferred Income Annuity. You can defer that for up to 13 months or as far out as 40 years. But it is a straight pension plan. It’s actually the cousin of a Single Premium Immediate Annuity. A Single Premium Immediate Annuity can be deferred as short as 30 days up to a year. Deferred Income Annuities, however, can be deferred from 13 months to 40 years. Both of these are simple products—easy to understand. A nine-year-old could understand them. You defer the money to a starting point that you determine for lifetime income streams, either single life or joint life, and the income stream is based on your life expectancy at the time you begin payments.

Qualified Longevity Annuity Contracts

Now, Deferred Income Annuities have a sister product called a Qualified Longevity Annuity Contract, which can only be used in some retirement plans like a traditional IRA, not a Roth. Once again, no moving parts, no annual fees, but it’s a future pension plan that you can start as late as 85 in your IRA. However, you don't have to wait that long—you can start it anytime before that, such as at age 72.

Income Riders

An asterisk here: Income Riders, which are not an annuity product but an attached benefit for future income, can also be attached to Deferred Annuities like Variable Annuities or Fixed Indexed Annuities.

Understanding the Income Side

I know that’s a lot, but let’s go through it again. These are the Deferred Annuities for income:

• Single Premium Immediate Annuities (deferred 30 days to a year)
• Deferred Income Annuities (deferred 13 months to 40 years)
• Qualified Longevity Annuity Contracts (for traditional IRAs or retirement plans)
• Income Riders attached to a Variable or Fixed Indexed Annuity for future income guarantees

All of these are transfer-risk products, meaning they’ll pay you as long as you live, forever. The annuity company is on the hook to pay, and we can structure them so that the evil annuity company doesn’t keep a penny. In other words, if your Learjet hits the mountain, whatever’s left in the account goes to your beneficiaries.

Deferred Annuities for Principal Protection and Growth

Now, let's talk about Deferred Annuities for principal protection and/or interest rate growth. So far, we've discussed the income side of Deferred Annuities: Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and Income Riders.

If you say, "Stan, I don’t want to lose a penny. I don’t care if the markets go to heck in a handbasket, I just don’t want to lose a penny, but I want to make some interest," there are two fixed annuities that fit that bill, and they’re Deferred Annuities.

Multi-Year Guarantee Annuities

One is a Multi-Year Guarantee Annuity (MYGA). It’s the annuity industry's version of a CD. You give the annuity company an amount of money and choose a specific term, and they’ll pay an annual interest rate. At the time of this taping, the interest rates range from 3% for a three-year term and more than 3% for a five-year term. Rates change depending on the state you live in.

Fixed Indexed Annuities

The other CD-type product, where you can never lose a penny, is a Fixed Indexed Annuity. Now, I know some of you might be thinking, “Wait. Someone told me it gets market returns.” I got a call the other day where someone said, “This guy told me I’m going to get market returns, and that will protect the principal.” Well, only part of that is true. The principal protection part is true, but with Fixed Indexed Annuities, you're not going to get market returns. They were designed in 1995 to offer CD-like returns. And think logically—if you could get market returns and protect your principal, that’s all the Fed would buy. So don’t believe the hype. It’s not a bad product—it’s just a CD product.

The Variable Annuity Option

The other type of Deferred Annuity is a Variable Annuity. I don’t sell those because I don’t sell anything that goes down. That doesn’t mean Variable Annuities are bad, but they are, in essence, mutual funds wrapped in a life insurance policy. Not a bad thing. They were created in 1955 for tax-deferred growth using mutual funds. The annuity companies, for whatever reason, call them separate accounts.

Wrapping Up the Deferred Annuity Universe

So, here’s the universe of Deferred Annuities:

• For income: Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and Income Riders
• For principal protection: Multi-Year Guarantee Annuities and Fixed Indexed Annuities
• For growth: Variable Annuities

When people say, “Never buy a Deferred Annuity,” what are they talking about? Which type are they referring to? That brings me back to the “I hate annuities” mantra. I hate all annuities. Which one are you talking about? Annuities aren’t for everyone, but you have to ask the two questions: What do you want the money to contractually do, and when do you want those contractual guarantees to start?

Learn More with My Books

I encourage you to get the books I’ve written on all of these products. I’ve written an owner's manual for each one of the Deferred Annuities I’ve discussed, and you can download them for free. If you want to discuss these annuities in detail, please schedule a call with us. I encourage you to do that.

Thank you for joining me today, I'll see you on the next Stan The Annuity Man blog.