Immediate Annuity vs Deferred Annuity [What is the Difference?]

Written by: Steven Gibbs | Last Updated on: April 4, 2023
Fact Checked by Jason Herring and Barry Brooksby (licensed insurance experts)

Insurance and Estates, a strategic life insurance provider composed of life insurance professionals, is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.

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Annuities are a contract between an individual (or business) AND an insurance company that is entered into for various purposes which include providing a guaranteed stream of income.

There are various types of annuities that are uniquely suited to meet various types of income needs and these will be discussed in this article.

However, before anything else, it is important to consider when the monthly payout period begins. Whether the income payment begins right away or down the road concerns today’s all important question of immediate annuities vs deferred annuities.

2 Phases of Annuities and the Annuity Start Date

ALL annuities have an Annuity Start Date (ASD) which refers to when the annuity payout period begins. All annuities also have 2 phases which are 1) the accumulation (savings) phase; and 2) the payout phase.

For today’s discussion, the key concept is that the ASD can be immediate OR deferred over a period of years and following regularly scheduled payments.

A critical factor is that once the ASD kicks in, this isn’t revocable and payments must continue unless the contract is surrendered or the annuity owner or designated party (annuitant) dies.

Now that we’ve set the stage, we can launch into the key differences between immediate annuities and deferred annuities.

Immediate Annuity and Deferred Annuity [Key Differences]


Immediate and deferred annuities are suitable for very different purposes to be discussed.

Suitability refers to whether a particular annuity is appropriate for a particular customer’s situation and goals. This concept is discussed in more detail in our overview of what is an annuity.

The short version is that those who market and sell life insurance products need to make sure they are suitable for the client’s individual circumstances and goals. This is a key consideration when it comes to deciding whether an immediate or deferred annuity, or neither, should be purchased by a particular client.

Suitability will be discussed in more detail concerning these 2 types of annuities: immediate and deferred.

What is an Immediate Annuity?

An immediate annuity, as compared to a deferred annuity, has no accumulation phase. In general, the income payments start soon after the premium payment is received by the insurance company. Usually, the ASD for an immediate annuity is not more than a year after the receipt of payment. Lump sum payments are only used for immediate annuities because multiple payments are not practical with no accumulation phase.

Non-Qualified Annuity

The lump sum premium payment is an attribute of immediate annuities and ALSO means that they fall into the category of non-qualified annuities as compared to qualified annuities. Qualified annuities are only used for funding a qualified retirement account or IRA and the amounts that may be deposited each year are limited by IRS regulations.

Retirement Income for Life 

Immediate annuities are suitable for people that are looking to secure a retirement income for life. An immediate annuity, as opposed to a deferred annuity, potentially offers the highest income for life of the two types. Generally, seniors may find that an immediate annuity is much more suitable than a deferred annuity due to the lack of time for accumulation of cash within the account.

Asset Protection 

An immediate annuity may also be a wise asset protection move for seniors and others in higher risk professions. The logic is that converting a non-qualified account (such as a checking, savings, money market or investment account) which has no asset protection INTO an annuity is a great way to protect the cash account from creditor law suits.

Asset protection laws vary from state to state so it is important to understand the level of protection that is available for annuities in your state of residence.

For example, states such as Florida and Texas offer asset protection for life insurance and annuities that is more comprehensive than less friendly states like California.

Asset protection is discussed in more detail in our e-book, the Estate Planner’s Tactical Guide, which is available for free download.

What is a Deferred Annuity? 

A deferred annuity, unlike an immediate annuity, has an accumulation phase. The ASD is typically years later after the initial premium payment is made (often 5 years or more) and either a lump sum payment or a number of installment payments may be used to fund the annuity contract. During the accumulation phase, the account will be set up to grow cash value based upon the formula selected by the annuity owner.

Annuity Accumulation Phase [3 Options]

Three options for accumulating cash value in an annuity are similar to the options for cash value accrual in a life insurance policy. In the same way that permanent life insurance offers options for consumers such as guaranteed universal life, indexed universal life, variable universal life AND dividend paying whole life insurance, annuity options for consumers include fixed deferred interest rate annuities, fixed index annuities and variable annuities.

Fixed interest rate annuities provide that the contract earns interest during the accumulation period at a rate of interest set by the insurance company based upon the performance of the company’s general portfolio account. The minimum interest rate is guaranteed by the company under this formula and, during the payout phase the amount of each income payment is set when the payments begin (on the ASD) and this will not change.

Fixed index annuities provide that the contract will earn a rate of return during the accumulation period that is based upon the performance of an external market index such as the S&P 500. This formula also ties the performance to the company’s general portfolio account and guarantees that the rate of return will never be less than zero. Similar to a fixed interest annuity, during the payout phase, the income payment amount is set when payments begin and this will NOT change.

Variable annuities provide that the premium is deposited into a separate account from the company’s general portfolio account during the accumulation phase. The annuity’s performance is based upon the market performance of the separate account typically invested similar to a mutual fund. Because the account performance determines the performance, the return on investment may be less than zero. At the end of the accumulation phase, the insurance company sets a minimum payment.

Because the accumulation phase of an annuity takes some time, a deferred annuity is often deemed NOT suitable for a retiree who requires immediate income. However, a deferred annuity may be suitable for younger individuals who wish to take advantage of the tax advantages of annuities and asset protection to build secure future retirement income.

Of the 3 types, fixed interest annuities are most appropriate as a safe bucket investment AND variable annuities are most appropriate for younger people with a tolerance for risk who are looking for a tax deferred investment.

Tax Deferred Growth

One of the key advantages of deferred annuities is tax deferred growth during the accumulation phase. Tax deferral for annuities is similar to the benefit of tax deferred growth with life insurance.  The idea behind tax deferred growth is that amounts not expended for taxes can be retained and used to maximize the amounts paid into the contract.

Tax Deferral Tips:  It is important to distinguish between tax deferred and tax free. Tax deferred growth means that the account may grow without paying taxes as long as the proceeds are left in the account (not withdrawn or surrendered).  The tax benefits of tax deferral requires some time to realize a benefit and thus would present a greater benefit (in terms of suitability) whereas immediate annuities offer a steady guaranteed income for older individuals for retirement.

When considering ANY annuity it is important to consider the loss of flexibility due to contractual surrender charges AND tax restrictions as discussed in our article featuring the Pros and Cons of Annuities.  It is also important to consider a wide array of investment options before making a final decision.

Please don’t hesitate to connect with us with any question or for more information.


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