Andrew Rosen: Immediate vs. Deferred Annuities

Welcome to the Annuity.org podcast, your path to financial freedom through better understanding annuities, selling structured settlements, personal finance and retirement planning. I’m Terry Turner, and in this episode, we continue our three-part series explaining the basics of annuities with a discussion of their two most basic types, immediate and deferred annuities. We’re joined again by certified financial planner and certified estate planner, Andrew Rosen. He’s president of Diversified LLC, which provides financial planning and investment management services. Mr. Rosen, thanks for joining us again.

Thanks for having me, Terry.

Can you explain the difference now between immediate annuities and deferred annuities? We talked about different types earlier, and these are two very different types of annuities, aren’t they?

Yes. For sure, Terry, for sure. So, at its simplest form, an immediate annuity is you take a sum of money, you shop it to a different insurance carriers, and you say, “I’m going to give you this much money and I want to know who’s going to give me the highest income or pension for my life or mine and my spouse’s life.” You can determine the criteria. There’s many different criteria for how you want it to pay. And then you find who just, today, will start paying you right now a pension, a fixed, predictable income stream.

A deferred annuity says I don’t need income today, but I want to… I do want some form of… Again, generally speaking, not all of them work this way, but I want to take my money, put it into an investment vehicle that will in the future give me a baseline which generates some sort of upside potential income stream. So, that’s basically the difference. It’ll grow in the markets in a deferred annuity with… Sometimes there’s features that give you some sort of step up or option to keep driving that income even higher years down the road when you need it.

Is there a difference in the costs and the returns between an immediate or a deferred annuity?

Yeah. The costs in an immediate annuity are less transparent. Generally speaking, it’s all embedded and in the rate they’re going to pay you. A deferred annuity, much more transparent in it, and depending what features you want. They’re not all the same, and they don’t have all the same features, and there’s a lot more bells and whistles to a deferred annuity. So, one of the things to be considering is the cost and benefit analysis when looking at a deferred annuity. What are you paying for, what are you willing to pay for and what’s the benefit, and are you comfortable with it?

When or under what circumstances should someone consider an immediate annuity over a deferred annuity or vice versa?

Yeah. An immediate annuity will generally give you the highest predictable payment. Conversely, you’re generally giving up those proceeds, any future use of those dollars. You’re saying, “Insurance company, I’m handing over my XYZ dollars into your care, and in turn, I want this money for as long as I live.” It’s much like a pension. When it stops, it’s done. If you live a hundred more years after giving the insurance company that money or a hundred more days, the money is theirs.

So how is a deferred annuity different in this particular case?

There’s typically more cost, and that’s for someone who wants to have some level of predictable income on their money, generally speaking, however, wants to keep control of those dollars for their or their heirs’ purposes. So, at its core, do you want the most amount of income, and that income today? That’s someone that is generally considering a immediate annuity. Or is it more a planning tool for their future and retirement, and they want to cover some portion of their retirement needs through a annuity and in such, but still maintain control?

And that’s the deferred annuity? So what are the pros and cons that people should consider before they buy any type of annuity?

The pro is predictability. You generally know what you’re getting, and some people like to have that, and whether it’s de-risking or help in their income needs or something of that nature. They’re much more of a fixed, predictable product, whereas your general investment world stocks and bonds and mutual funds and ETS go up and down and are not predictable. For that, you are usually giving up something.

The con is you’re giving up something, whether that’s flexibility on the dollars, whether that’s costs, whether that’s how much of the upside you keep, whether that’s usability of those funds in the future. The big buyer beware is know the annuity inside and out, and know what it costs, and know what you’re getting and giving up.

What costs should people look out for when they’re buying an annuity? What costs are out there besides just the premiums you’re paying?

So, one, there’s opportunity costs or cost to get out of the product if you get in. One is, there is M&E expense, which is a mortality expense. There is cost for the funds you’re purchasing or sub-accounts in an annuity if it’s a defer. And then, there’s the cost of the bells and whistles you wish to purchase. So in annuity, because you’re buying and you’re de-risking in a lot of regards and putting some of the risk on another entity, i.e. an insurance company, you’re paying for that benefit. So, you should just know what the cost of that benefit is.

Thanks, Andrew.

You take care, and I hope this is helpful.

Andrew Rosen, president of Diversified LLC in Delaware, Pennsylvania, Massachusetts and Alabama. And thank you for joining us on the Annuity.org podcast. On our next episode, we’ll continue our introduction to the basics of annuities with Mr. Rosen with a discussion about annuities as investments. In the meantime, for more information about annuities, personal finance, anything else we talk about here, check out Annuity.org, your path to financial freedom. You can subscribe to the Annuity.org podcast for free wherever fine podcasts are found.

And, by the way, if you have any questions about annuities or you have a story about how annuities have played into your personal financial planning or into your retirement, we’d love to hear from you. Drop us an email. The address is [email protected]. Our theme music, Feeling Good, was produced by White Hot. It’s available at Freebeats.io. I’m Terry Turner for Annuity.org.