Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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A fixed deferred annuity is an investment that allows you to pay a premium or premiums to your insurance company with a guaranteed interest rate for the duration of your investment.

The fixed part of the annuity refers to the fact that the interest rate isn’t a variable interest rate. In other words, it doesn’t depend on an outside funding source, such as a mutual fund, for the investment.

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The deferred part of this scenario refers to the fact that you are deferring the payment of your investment to a later date.

Once you start your annuity, for example, you should keep your money in the annuity for as long as you possibly can. If you withdraw you money early, you will face penalties from the insurance company.

A deferred annuity also allows you to wait until you withdraw your investment money before you pay taxes on it. You will not have to pay money on the principle if you use after tax money to start your annuity. You will, however, have to pay money on any interest accrued on the account.

A fixed deferred annuity is best for those individuals who want to save money for retirement over a period of time. In other words, this isn’t the right investment for a 60-year-old looking for retirement options.

What do you need to start a fixed deferred annuity?

What you need to start a fixed deferred annuity can vary from insurance company to insurance company. In most cases, however, you will be required to have at least $2,000 to invest.

You will also find that there are single premium fixed deferred annuities and flexible premium fixed deferred annuities. If you choose a single premium option, then you can expect your minimum investment to be, at minimum, in the $20,000 range rather than the $2,000 range.

You will also need to establish a length of time for your annuity to last. Although you can contract for a fixed annuity to mature in one year, you will benefit the most from your fixed deferred annuity if you choose a 10-year or longer option.

In fact, many insurance companies will not allow you to collect on your matured annuity until you turn 59 and 1/2 years old. This doesn’t mean that you can’t collect on your annuity, just that you will have to pay the penalties preset by the insurance company if you collect before the specified period of time.

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How does a fixed deferred annuity work?

Think about a fixed deferred annuity like you would a bank account. You deposit money in your account and you let the interest rate grow. There are a couple of difference between a fixed deferred annuity and a bank account, however.

  • First of all, you will be taxed every year on any profits from money you deposit in a bank. With this annuity your taxes are deferred until you actually withdraw the money. Many people do choose to continue to pay the taxes on their annuity simply because it prevents a large tax bill at a later date, but the bottom line is that if you don’t withdraw any money from the annuity to pay our taxes, then you will have more money in your investment fund.
  • A fixed deferred annuity draws a higher interest rate than a bank account does because the insurance company invests your money into long-term bonds, which yield higher interest rates than short term bonds. In addition, a fixed deferred annuity draws a higher interest rate than CDs. While a mutual fund may perform better, its function is based on the stock market and a bad year could actually mean losses for you.

This leads to the next part of a fixed deferred annuity; your principal is guaranteed, you cannot lose your investment if you choose a fixed deferred annuity. Of course, you must choose a financially solid insurance company because there is no recourse for you should the insurance company you choose go out of business. Check the stability of an insurance company through rating companies such as A.M. Best or Standard & Poor’s.

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You are also guaranteed a minimum return on your investment in terms of interest. The benefit here is that the insurance company cannot turn around and lower your interest rates because they are having a bad year. You do need to ensure, however, that the guaranteed interest rate meets or exceeds that of an interest wielding savings account; otherwise choosing a fixed deferred annuity will be pointless.

A fixed deferred annuity isn’t like a fixed immediate annuity. What this means is that this is not an investment that is meant to pay for itself right away. Instead, you will invest for a number of years and then collect on your annuity when that span of time has expired. You can choose to receive monthly annuity payments, which allows the balance in your account to continue to accrue interest, or you can receive a lump sum payment.

There are no contribution limits when you choose a fixed deferred annuity, which makes it an excellent long-term investment for younger adults. If you choose a flexible premium account, then you can add money monthly or annually to your annuity and watch it grow over the years. If you choose a single premium annuity, then you will have to open a new account each time you are ready to invest more into an annuity.

Unlike a fixed immediate annuity, a fixed deferred annuity allows you to leave your money to a beneficiary. In this regard a fixed deferred annuity is very much like a life insurance policy. There is a guaranteed payout and you can leave that money to whomever you want.

This money, however, is not tax free and you will be placing the tax burden on your beneficiary if you should die before you collect on your annuity. A fixed deferred annuity should not take the place of a life insurance policy, instead consider purchasing both if you think a fixed deferred annuity is right for you.

Are there any downsides to choosing a fixed deferred annuity?

There are often many fees associated with starting a fixed deferred annuity so it is important that you know up front what you will have to pay out of pocket. In addition, there are penalties for withdrawing your money early, even in if you have an emergency that warrants the withdrawal of your money.

You need to read all of the fine print on your contract with the insurance company to ensure that you understand what your options are if you need access to your money.

  • Some insurance companies will allow an annual withdrawal of 10% of your money for any reason.
  • Some have no flexibility at all, so if you feel that you may need access to the money then try to find an insurance company with the least amount of penalties.

Finding the insurance company with the best interest rates and lowest fees is easy if you use a comparison tool to look at your options. You can use our comparison tool right now to compare the rates and fees between companies. What’s more, you aren’t under any obligation to invest your money or make a decision about a fixed deferred annuity. This simply gives you the opportunity to see what your options are and what you can afford.

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