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Deferred vs Immediate annuity: Take money now or later

In the earlier article I have discussed the idea of immediate annuity and how it can be a source of income during the days of retirement. But immediate annuity isn’t the only form of annuity available in the market. There are other types of plans available as well to cater to various needs of the growing customer base.

Depending upon the time you start receiving the payments, the annuity plans can be categorized as- immediate annuity and deferred annuity.

What is deferred annuity?

With the deferred annuity plan the annuity begins at a future date, i.e. the annuitant can choose a future date from when (s)he would prefer to get the annuity income. Deferred annuity plans are for people who would like to start planning early for their future.

Deferred vs immediate: How they differ?

The difference is only in the time from when the annuitant would start receiving the benefits. Both deferred and immediate annuity plans have their buyers.

Immediate annuity plans appeal more to people who are close to their retirement age.  Also, if you are expecting a sudden wind-fall, you may put the money in an immediate annuity plan and start getting monthly benefits from it.

However, people who aren’t likely to receive lump-sum retirement benefits upon their retirement may like to start planning early. Deferred annuity is the option for them. They can actually build the asset gradually which they can cash-in at the time of retirement.

Advantages of deferred annuity

One advantage of starting early is that unlike immediate annuity, which needs to be purchased with lump-sum amount, the annuitant that add small amount to his deferred annuity account and can get larger income upon retirement.

Secondly, immediate annuity plan is an irrevocable contract, i.e. you are locked into the contract till it lasts. With deferred annuity plans, you continue enjoying access to your money in the annuity account. You may also be allowed to make partial withdrawals from it at the time of need or may terminate the contract altogether.

Finally, the money invested in the deferred annuity fund would keep growing on a tax deferred basis. The tax applies once you start withdrawing from the account.

Immediate annuity: The income you won’t outlive

With the downturn of the market and the crippling cost of health care, living a long life has lost its appeal to many. The graying population fear of outliving their saving after retirement. And many are even delaying the idea of retirement when they can. But, a healthy and peaceful life after years to bone racking hard work is something that we all deserve. The idea of annuity has come as a solution to this problem. Further, the idea of ensuring a stream of income that you can’t outlive seems even more appealing.

The latter concept is known as immediate annuity which starts paying small income to the holder almost immediately.  It’s also known as the single premium immediate annuity (SPIA) plan.

SPIA is a contract that’s drawn between you and the insurance company where you pay the company in lumpsum and in return the insurer promises to restore a stream of income for the rest of your life.

You can also customize the annuity plan

There are also several options available with the immediate annuity plan which would help the owner to customize the plan to suit his/her needs, i.e. if the annuitant chooses; he/she can opt for the lumpsum refund option which would pay the beneficiary the residual amount available in the annuity fund after the death of the annuitant.

Some insurer may also allow to choose the option that would ensure annuity income to the living spouse after death of the policy holder. Dependant spouse can benefit from this idea.

‘Life only’ option is for those who only need the income as long as they live and in this situation the monthly receipt from the annuity fund is greater than the previous two options since the insurer has no commitment to meet after your demise.

Now, the downside of immediate annuity

For those with skeptical minds the above discussion may sound too good to be true. So, here I’m serving the negatives of the immediate annuity plan.

Buying the fixed immediate annuity plan is a non-reversible decision, i.e. once you have purchased it, you can’t back out of the contract. Therefore, be absolutely sure before you put your money in it.

The company may not last as long as you live, and in the present economic scenario stability of a company isn’t guaranteed. However, most likely another company would take over the sinking one but you’d need to keep yourself updated with the changes.

Another draw back of fixed annuity is that you are getting locked in an interest rate. Therefore, when the market rate would go up you’ll lose in terms of interest earning.

Hope you would find this article useful and would evaluate all your options before putting your initials over the dotted line. Always get all your queries solved by the agent you are dealing with. Any ambiguity about the plan may cause trouble in the future.

Medicare Advantage: a rip-off !!

Senior healthcare expenses are covered by Medicare, but it doesn’t cover 100% of the costs. The recipient of the program has to share a percentage of the expense with the provider in the form of deductible and co-pay. There are certain plans available in the market which would help you in reducing the out-of-pocket expenses towards Medicare. Medicare Advantage is one such alternative.

However, from my interactions with various health agents as well as consumers I have realized that Medicare Advantage, though it may have worked in fewer instances, overall has failed to serve the purpose it was designed for.

Medicare Advantage is the privatized form of Medicare. Medicare advantage plans are available through the private health insurance providers against payment of premium.

A comparison between the traditional Medicare and Medicare Advantage

With the traditional Medicare the central agency would handle your bills. You are required to meet the deductibles and co-payments and the rest would be paid by Medicare authority.

You normally have paid for Medicare through your employment and therefore aren’t required to pay monthly premiums for the services. However, one is required to pay premium he wishes to opt for Medicare part-B benefits, which would cover the prescription drugs.

Medicare Advantage plans are the combination of Medicare part-A and part-B. With Medicare Advantage plans you may have to pay lower deductibles and co-payments as compare to traditional Medicare. These plans are available through the private providers and you may be required to pay monthly premiums for it, though some cashless plans are also available in the market.

Since its offered by the private insurers, the Medicare Advantage providers, therefore, may impose restrictions upon the services you can use, thus may interfere in your healthcare. In Medicare Advantage plans you are required to visit the doctors who are within the network.

However, some Medicare Advantage plan may include the vision and dental plan, which is still better than nothing.

Alternatives of Medicare Advantage

If the question is to meet-up the gaps left by Medicare, supplemental health plans and/or Medigap can be looked as the alternative to Medicare Advantage plans. Remember, that if you opt for Medicare Advantage the Medigap policy will no longer remain effective. Therefore, you should be careful about the choices you make.

Another option can be the Medicaid program. The program is jointly managed by the Federal and State Government. The eligibility for Medicaid, however, would strictly depend upon the income of the individual.