It is common to confuse the different kinds of annuities. Please continue reading. This is an easy to read text where Immediate & Deferred Annuities explained.
When you purchase an Immediate Annuity, you are depositing a lump sum of money with the insurance company, and in return, you receive a guarantee that they will pay you income spread out over a defined time period, or for the remainder of your life. These payments will come to you at regular intervals, and the size of the payment is based on your initial lump sum allocation and your current age. Depending on the type of annuity you purchase, your annuity income payments may remain stable or receive annual increases.
Why would someone buy an immediate annuity? Immediate Annuity investors are interested in guaranteed income and the security of knowing the income will continue throughout their retirement. Immediate Annuity investors do not require a high level of liquidity in their investment and intend on leaving their principal in the Annuity for an extended period of time.
When you purchase a Deferred Annuity, you deposit a lump sum of money with an insurance company, and then it is left untouched and allowed to grow tax-deferred until a contractually agreed upon date. Although all Deferred Annuities enable you to access any or all of your money at any time, withdrawals within the surrender period are usually discouraged by imposing surrender fees. However, during the surrender period, almost all Deferred Annuities allow you access 10% of your Annuity value annually without incurring a surrender charge.
Why would someone buy a deferred annuity? A Deferred Annuity investor has a lump sum of money they can invest and do not need immediate liquid access to it. They are looking for an investment that will provide robust growth and avoid taxes until they withdraw the money after they are 59 1/2 years old.