definition

A contract between an account owner and a life insurance company that is designed to pay a guaranteed lifetime income beginning at a later date.  The cash value of the annuity can be invested into a fixed account or variable sub-accounts.  If guaranteed lifetime annuity payments are not desired, withdrawals can be taken as a lump sum or in installments.  Can be a non-qualified account, or held within IRAs and qualified retirement plans.  Normally sold on a commission basis,  and carrying surrender charges for many years as a result.  Income taxes on the internal buildup are deferred until withdrawn.   Annuity rules apply.

commentary

The actual investments held within deferred annuities are similar to non annuity accounts:  fixed accounts are quite similar to guaranteed interest bearing time deposits, and variable sub-accounts are similar to mutual funds.  However, annuity contracts involve not only the management of these investment accounts,  but also a third party: the life insurance company that issues the annuity.  This third party must be compensated,  and this increases the annuity costs.

Due to the excessive costs and illiquidity,  we view most deferred annuities as a poor investment.  Some “fee-only” deferred annuities are available,  which eliminate the excessive costs and surrender charges.  A deferred annuitiy can be a good choice as a rescue vehicle from a life insurance policy via a tax free 1035 exchange.