What is a Single Premium Deferred Annuity?

What is a Single Premium Deferred Annuity?

Among the many investment opportunities for retirement, a favorite is the single premium deferred annuity. In what follows, the pros and cons of this investment vehicle have been discussed.
If you want your tomorrow to be secure, it is necessary that you save today and invest that money wisely. At some point of time, you need to stop procrastinating about retirement planning and take a firm decision about how you are going to invest your savings for a secure future post retirement. Insurance companies offer a single premium deferred annuity, which is one of the most sound investments you could make for the future.

About Annuities

Let me brush up a bit of basic information about what annuities are, before we go ahead and discuss its specific type. A type of insurance, annuity is an investment which pays you an accrued interest over a period of time. There are different types of annuities, including a fixed and variable type. They can guarantee a lifetime of income, which make them some of the most sought after insurance products.

Definition

Single premium means that the money invested in this type of annuity is paid as a one time full payment or lump sum payment. It is 'deferred' because payment of accrued interest starts after a long period of time, which is usually past the retirement age of the annuitant (the person who buys the annuity). In this case, interest keeps accruing tax-free on your invested amount, although the amount invested is not tax-deductible. The interest keeps growing till the maturity period is reached, after which you are paid the interest back, along with principal.

So you buy an annuity with a lump sum and then wait till the onset of your retirement years, when it starts paying off. You pay taxes on the interest, only when you start receiving payments. Interest rates of these annuities can be fixed or variable and are totally dependent on the insurance company.

Pros and Cons of Buying One

One of the prime advantages lies in the fact that your interest grows without taxes imposed on it, till withdrawal or maturity period. That's what makes it an attractive option for retirement age. Unlike an individual retirement account (IRA), there is no limit on how much you can invest in it, while your interest grows tax deferred.

One of the obvious cons is locking up of your principal for a considerable period of time. So if you need funds in an emergency, they won't be available to you. Another disadvantage is that these insurance products are not guaranteed by any of the federal authorities. This makes them risky investments. However, the pros far outweigh the cons of investing in it.

As discussed before, it is important to keep in mind that this type of annuity is not protected by Federal Deposit Insurance Corporation (FDIC) or any other government agency. Therefore, it is essential that you run a background check of the company. Go for a trusted insurance company like Berkshire Hathaway Life Insurance company, instead of opting for recent upstarts. Check out Standard & Poor's ratings for insurance companies when choosing one.
Advertisement