Deciphering Deferred Variable Annuities

Shawn Plummer

CEO, The Annuity Expert

When we navigate the labyrinth of financial planning, we encounter various terms and products that often confuse us rather than enlighten us. One such product that has consistently boggled the minds of many is deferred variable annuities. With this guide, I intend to demystify deferred variable annuities, helping you understand what they are, how they work, and who regulates them.

No one wants to spend their golden years worrying about finances. For that reason, many people invest in deferred variable annuities, a financial product designed to provide a steady income stream in retirement. But the landscape of variable deferred annuities can seem daunting and complex. Through this guide, we’ll strive to simplify this landscape, providing a comprehensive understanding you can apply to your financial planning.

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What are Deferred Variable Annuities?

A deferred variable annuity is a long-term investment product that combines tax deferral with growth potential. It’s called “deferred” because you don’t receive income immediately. Instead, the annuity accumulates over time, and payouts begin at a date specified in your contract, usually after you retire.

The “variable” part means that the money you invest is put into sub-accounts (similar to mutual funds), where it can grow based on the performance of those investments. Your returns are “variable” because they can go up or down depending on market conditions.

For example, Lisa, a 40-year-old corporate lawyer, decides to invest in a deferred variable annuity. She allocates a lump sum payment of $200,000 to this annuity. The money won’t be returned to her immediately but will instead be invested in a range of sub-accounts, mimicking the performance of various mutual funds. This sum will grow tax-deferred until Lisa decides to retire at age 65, when she can start receiving payouts.

Deferred Variable Annuities

The Nitty-Gritty of Variable Deferred Annuities

Investment Phase

The investment phase of a variable deferred annuity is when you put money into the annuity. This can be a lump sum or a series of payments over time. During this phase, your investments have the opportunity to grow tax-deferred.

Accumulation Phase

The accumulation phase is the time during which the money in your annuity is growing. The length of this phase can vary, but it often lasts until the annuitant retires.

Distribution Phase

The distribution phase is when you begin receiving payments from your annuity. These payments can be set up in different ways, including a lump sum, a certain amount for a certain number of years, or an income stream for life.

Deferred Variable Annuity

Regulation of Variable Insurance and Variable Annuities

The world of financial products is regulated to protect consumers, and variable insurance and variable annuities are no exception. These products are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). These bodies ensure that the companies offering these products follow specific rules and regulations to protect investors.

Variable Deferred Annuities

Benefits and Drawbacks of Deferred Variable Annuities

Like any financial product, deferred variable annuities have advantages and drawbacks. On the positive side, they offer tax-deferred growth, the potential for higher returns, and a guaranteed income stream during retirement. However, they also come with potential drawbacks like higher fees, a complicated structure, and the risk of losing money due to market volatility.

Next Steps

Deferred variable annuities are not for everyone, but they can be a valuable tool for those looking for tax advantages and the possibility of a steady income in retirement. Before deciding to invest in one, it’s essential to understand what it is, how it works, and the potential benefits and drawbacks.

Remember, financial planning is a journey, not a destination. By taking the time to understand complex products like deferred variable annuities, you’re arming yourself with the knowledge to navigate that journey successfully. You’re paving the way toward secure and fulfilling golden years with every wise decision.

Deciphering Deferred Variable Annuities (2023)

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Frequently Asked Questions

What should I consider before investing in a deferred variable annuity?

Before deciding to invest in a deferred variable annuity, it’s important to understand what it is, how it works, and the potential benefits and drawbacks. It’s also important to seek professional advice from a financial advisor who can help you decide if this is the right product for your individual situation.

Is a deferred variable annuity right for me?

It depends on your individual goals and financial situation. Deferred variable annuities may benefit some people but may not be the best option for others. Be sure to talk to a financial advisor who can help you decide if this product is right.

What are some other retirement planning options?

Other retirement planning options include traditional IRA and 401(k) accounts, Roth IRAs, annuities, life insurance policies, and Social Security benefits. Each has advantages and disadvantages, so it’s important to research and understand each product before investing. A financial advisor can also help you decide the best option for your situation.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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