Definition of Individual Annuities - Deferred Non-Variable and Variable
Deferred individual annuities are contracts purchased by individuals with an insurance company, consisting of two main types: non-variable and variable annuities. These annuities grow investments over time and aim to provide a stable income stream at a future designated date, which is particularly aimed towards retirement savings.
Non-Variable Deferred Annuities
- Key Attributes:
- Fixed Returns: Investments are focused predominantly on steady growth by accumulating funds based on guaranteed crediting interest rates or potentially added interest rates attached to specific payments or premiums.
- Risk: Low-risk return, since the interest rate is fixed and does not depend on the market’s fluctuations.
Variable Deferred Annuities
- Key Attributes:
- Variable Returns: Accumulations in these annuities fluctuate according to the performance of selected investment portfolios, where policyholders have the option to allocate their funds.
- Risk: Higher risk associated with market performance, provides potential for higher returns compared to non-variable annuities.
Initiation of Payments
Both variable and non-variable annuities are oriented for pay-outs starting at a predefined future time—usually envisioned at the policyholder’s retirement. Such arrangements allow finances to compound over time, hopefully leading to larger retirement benefits.
Financial Implications
- For Retirement Planning: Deferred annuities provide individuals with a method to save systematically for retirement, benefiting from deferred tax implications as according to the Internal Revenue Service regulations.
- Savings Potential vs. Inflation: The growth of annuities should be considered in the context of inflation as non-variable options might lose purchasing power over time if inflation rates exceed the fixed returns. On the other hand, variable annuities offer a chance to outpace inflation through potentially higher, though riskier, returns linked to market performance.
Both forms of annuities represent critical tools for financial planning, each catering to different risk tolerance levels and financial objectives.
