9.3 Immediate vs. Deferred and Single vs. Flexible Premium

Two Independent Classifications

Annuities are described by two separate axes: when income begins and how premiums are paid. The exam combines them into product names like SPIA and FPDA.

Exam tip: A product name reads premium-then-timing: a Single Premium Deferred Annuity (SPDA) is one lump sum that starts income later; a Flexible Premium Deferred Annuity (FPDA) takes varying deposits that start income later.

These two axes are independent of the crediting method covered earlier (fixed, indexed, variable). A real product layers all three labels — for example, a flexible premium fixed deferred annuity or a single premium variable immediate annuity. The exam expects you to decode each label component and never to combine the impossible flexible-premium-immediate pairing.

Immediate vs. Deferred (When Income Starts)

Immediate Annuity

A Single Premium Immediate Annuity (SPIA) begins income payments within one payment interval of purchase — within one month for monthly payouts, or within one year at most. It is always funded with a single lump sum, because income starts right away and there is no accumulation period to fund with installments.

• Typical buyer: a retiree converting a 401(k) rollover into immediate lifetime income.
• No accumulation phase; the contract goes straight to payout.

Deferred Annuity

A deferred annuity delays the income start date — often years or decades. This allows tax-deferred accumulation first. Deferred annuities can be funded by a single premium or by flexible premiums.

Single vs. Flexible Premium (How Premiums Are Paid)

Single Premium

A single premium annuity is funded with one lump sum and no further deposits are allowed. It can be immediate (SPIA) or deferred (SPDA).

Flexible Premium

A flexible premium annuity allows the owner to make varying deposits on a flexible schedule, subject to contract minimums and maximums. Because deposits arrive over time, a flexible premium annuity must be deferred — income cannot begin immediately while contributions are still being made.

This is why no "Flexible Premium Immediate Annuity" exists. The valid combinations are:

• Single Premium Immediate Annuity (SPIA)
• Single Premium Deferred Annuity (SPDA)
• Flexible Premium Deferred Annuity (FPDA)

Exam trap: If an answer choice lists a 'Flexible Premium Immediate Annuity,' it is always wrong.

Surrender Charges and Liquidity

Deferred annuities use surrender charges to recover the insurer's upfront commission and acquisition costs if the owner withdraws early. Typical features:

• A declining schedule over 6–10 years (e.g., 7% in year 1, falling 1% per year to 0%).
• A free withdrawal corridor, commonly 10% of value per year, exempt from the charge.
• A 10% IRS penalty on the gain for withdrawals before age 59½ (separate from the surrender charge).

Worked Example

Value $100,000, year-3 surrender charge 5%, with a 10% free corridor. The owner withdraws $30,000. The first $10,000 (10% corridor) is charge-free; the remaining $20,000 is charged 5% = $1,000 surrender charge. If the owner is under 59½, the taxable-gain portion of the full $30,000 also incurs the 10% IRS penalty.

Immediate annuities have no surrender charges because there is no accumulation value to surrender.

Matching Product Combinations to Client Needs

The three valid combinations each serve a different planning need. Recognizing the fit is tested through scenario questions.

A common rollover strategy is to accumulate in an FPDA during working years, then annuitize it or do a 1035 exchange into a SPIA at retirement to lock in lifetime income. The choice between fixed and variable crediting is layered on top of these timing/premium structures — for example, a Flexible Premium Variable Deferred Annuity combines flexible deposits, separate-account investing, and a delayed income start.

Free-Look and Annuitization Date

Annuity contracts include a free-look period (commonly 10–30 days, set by state law) during which the owner can return the contract for a refund. For a variable annuity, the refund may be account value rather than full premium, because subaccount values can change.

Deferred annuities specify a maturity or annuitization date — the latest age (often 85–95) at which the owner must begin income or surrender. Owners can usually annuitize earlier. Choosing to take systematic withdrawals instead of annuitizing keeps the lump sum accessible but forfeits the mortality-credit boost and the guaranteed-for-life feature.

Exam tip: Annuitization is generally irrevocable; systematic withdrawal preserves access but offers no lifetime guarantee unless paired with a withdrawal-benefit rider.

Payout Frequency and Mode

Once income begins, the owner selects a payment mode — monthly, quarterly, semiannual, or annual. More frequent payments slightly reduce each total because the insurer holds the reserve for less time. Payments may be fixed (level dollars from a fixed annuity) or variable (changing with subaccount performance). The interplay of timing, premium structure, crediting method, and mode is why two annuities with the same premium can produce very different income streams.