How Long is the Accumulation Period for Immediate Annuities?

The short answer? Immediate annuities actually don’t come with an accumulation period. Once you have paid premium into the contract – in most cases a one-time lump – the insurance carrier will start income payments nearly right away. Your income payouts may start anywhere from 1-12 months after the premium payment date.

When this starting date is depends on your contract and frequency of payments. You may receive income on a monthly, quarterly, or even annual basis. Many contract holders opt for a monthly payment schedule.   

The insurance carrier puts the entire sum of your premium into a pool of other premiums it has been paid. Then it allocates these premiums into conservative, low-risk investments. In return, the carrier pledges to make payments to you – or someone you specify – for a specified period of time, which can be for the rest of your life. The income you receive includes a fixed sum and interest paid on a continual basis.  

Therefore, immediate annuities don’t have an accumulation period – there is little time between when you pay premium and start receiving income. Many immediate annuity contracts start income payments just a month after the day you bought your annuity.

Where accumulation periods do apply is with deferred annuities. In these contracts, your money will be left alone for a number of years before you start taking income. Let’s get into more details below.

Immediate and Deferred Annuities

Like their name says, deferred annuities are contracts in which you ‘defer’ receiving income payments for a specific timespan. During this time, your money grows in the deferral period. Since this is the time before you start taking income, it’s called the “accumulation period.” The period when an insurance carrier pays you income is called the “distribution period.”

In terms of length, accumulation periods can vary quite significantly in different contracts. An important point to remember is the longer you wait and the more premium you put into the contract, the higher your future income will be.

Unlike deferred annuities, immediate annuities have no period of deferral. Their benefit is they provide a steady income stream nearly right away, and contract holders can pretty much “get it and forget about it.” Once an immediate annuity contract is in place, the only thing you have to do is collect your income payments and monitor the cash-flow. Immediate annuities can take away the “stress” of monitoring market activity, tracking interest rates, or keeping an eye on dividends for income purposes.

On the other hand, deferred annuities can provide more income than immediate annuities. The accumulation period of deferred contracts gives your money time to grow. And generally speaking, the longer you wait, the more income you may receive.  

How Accumulation Period May Factor into Annuity Purchase Decisions

From that standpoint, some retirement savers may ask if they should purchase an immediate annuity or a deferred annuity. The answer is it depends. Any annuity buying decision, and a decision regarding any financial product in general, should be carefully weighed according to many variables. This article doesn’t cover what those annuity planning variables might be, but one important consideration is the surrender period tied to deferred annuities.

Most deferred annuities will have surrender periods built into their contracts. Surrender periods apply in the early stages of the accumulation period. For fixed annuities, a surrender period can last anywhere from 3-10 years. Among fixed index annuity contracts, a surrender period can be 7-15 years long, with many index contracts specifying 10 years.

If you choose to withdraw money or give up the contract during the surrender period, you will likely have to pay a surrender charge. Surrender charges can be up to 10% of your contract value. However, most deferred contracts allow you to withdraw a certain percentage of your money without penalty – often up to 10% of your contract value. However, keep in mind that withdrawals before age 59.5 may be subject to a 10% IRS penalty, and income taxes apply to contract withdrawals.

With that said, many deferred annuities may come with an income rider. This is an add-on feature which can let you access your money, via withdrawals, earlier in the contract. You can ask a knowledgeable financial professional for more details about this option.

How Are Premiums Calculated?

As stated earlier, contract withdrawals before age 59.5 are called “early withdrawals.” They can be hit with a 10% IRS penalty. For this reason, many people opt to purchase immediate annuities when they are retired or past 59.5 years old. In fact, most Americans choose to purchase annuities after the ages of 65-70 to maximize their payouts.

In the case of a straight life annuity, the insurance company will calculate the anticipated interest rate, the principal, and the annuitant’s life expectancy to determine the amount they will receive periodically until death. If the person dies before their life expectancy, their heirs may not be entitled to any remaining money. That said, if the annuitant outlives their life expectancy, they will still continue receiving income. For this reason, many people who are worried about outliving their savings purchase immediate annuities and ensure a stable lifetime income.

There are also other types of immediate annuity contracts that ensure your principal. For example, a fixed term immediate annuity will pay out during a specific amount of time, such as 10 or 20 years. If someone passes away before the fixed period is up, then their beneficiary will receive the rest of the income.

Another option is an immediate annuity with a refund feature, meaning that if the annuitant dies before the full premium is paid out, their beneficiary will receive a lump sum or period installments refund. Additionally, couples can opt for a joint annuity, whereupon the death of one of the spouses, the other will continue receiving income from the annuity.

Closing Thoughts on Immediate Annuities

For many people worried about income and financial safety, annuities can be an attractive option. They offer a high degree of security, they can provide a guaranteed income for as long as someone lives, and they may deliver other benefits.

However, for those who are already retired, an immediate annuity can provide peace of mind. It will start paying income nearly right away. But you should be mindful of a number of factors when considering different options, including what your actual payout amount will be and how long the guarantee will last for.

For those who are worried about not having enough savings for retirement, an immediate lifetime annuity can be an excellent choice. Alternatively, if someone isn’t in great health, it may be a good idea to ensure refund or spousal privileges are part of your immediate annuity contract.

Need help with finding the right immediate annuity strategy for your needs and goals? Financial professionals at SafeMoney.com stand ready to help you. Use our “Find a Financial Professional” section to connect with someone directly for a no-obligation consultation. Should you need a personal referral, please call us at 877.476.9723.