9.3 Immediate vs. Deferred and Single vs. Flexible Premium
Key Takeaways
Immediate annuities (SPIAs) use a single premium and begin income within about one year, with no accumulation phase.
Deferred annuities delay income, accumulate value tax-deferred, and may be single (SPDA) or flexible premium (FPDA).
A flexible premium annuity is always deferred; a flexible premium immediate annuity cannot exist.
Match the fact pattern: lump sum + income now = SPIA; periodic deposits + income later = FPDA.
Deferred annuities impose declining surrender charges, usually with a 10% annual free-withdrawal allowance.
Beyond the investment classification (fixed/indexed/variable), annuities are categorized by when income begins and by how premium is paid. These two axes combine to produce the named product types the exam expects you to identify from a fact pattern.
Classification by When Income Begins
Immediate Annuities
A Single Premium Immediate Annuity (SPIA) is purchased with a single lump-sum premium, and income payments begin within one payment interval — typically within one year, often within 30 days to one month. There is essentially no accumulation phase. SPIAs are used to convert a lump sum (a retirement rollover, inheritance, or settlement) into immediate guaranteed income.
Deferred Annuities
A deferred annuity delays income to a future date, allowing the contract to accumulate value tax-deferred during the waiting period. Income may not begin for years or decades. Deferred annuities have a full accumulation phase and can later be annuitized or surrendered. The exam distinction: immediate = income within ~1 year, single premium only; deferred = income later, single or flexible premium.
| Type | Premium | Income Begins | Accumulation Phase |
|---|---|---|---|
| SPIA (immediate) | Single lump sum | Within ~1 year | None |
| SPDA (deferred) | Single lump sum | Future date | Yes |
| FPDA (deferred) | Flexible/periodic | Future date | Yes |
Classification by How Premium Is Paid
Single Premium
A single premium annuity is funded with one lump-sum payment and no further contributions are allowed. This funds both SPIAs (immediate) and SPDAs (single premium deferred annuities). A retiree rolling over a 401(k) balance commonly uses a single-premium contract.
Flexible Premium
A Flexible Premium Deferred Annuity (FPDA) allows the owner to make periodic, variable contributions over time — more, less, or skip payments within contract limits. Because contributions occur over time, a flexible premium annuity is always deferred; you cannot pay flexible premiums into an immediate annuity, since income would have to start before the premiums are complete.
The Key Logical Trap
There is no such thing as a 'flexible premium immediate annuity.' An immediate annuity must be single premium, because payments begin almost at once and the full purchase amount must be on hand. Conversely, a flexible premium contract is always deferred. Expect a question that lists 'flexible premium immediate annuity' as a distractor — it is impossible.
Scenario: Matching the Need
- A 66-year-old wants income starting next month from a $300,000 lump sum → SPIA (single premium immediate).
- A 45-year-old wants to contribute $300/month until retirement → FPDA (flexible premium deferred).
- A 60-year-old rolls over $200,000 but wants income to start at 70 → SPDA (single premium deferred).
Surrender Charges and Liquidity
Deferred annuities carry surrender charges during an early surrender period (often 5 to 10 years) to recoup the insurer's acquisition costs. A common structure declines annually, e.g., 7% in year 1, 6% in year 2, and so on to 0%. Most contracts allow a free withdrawal of up to 10% of value per year without a surrender charge. Surrendering a $100,000 contract in year 2 at a 6% charge costs $6,000 in surrender penalties (separate from the 10% IRS penalty if under 59½).
Two independent axes: when income starts, how it is funded
Annuities are classified on two separate dimensions. Combining them correctly is the heart of this topic:
| Single premium | Flexible premium | |
|---|---|---|
| Immediate | SPIA — one lump sum, income within ~1 year | Does not exist |
| Deferred | SPDA — one lump sum, income later | FPDA — periodic deposits, income later |
An immediate annuity (SPIA) has no accumulation phase; you hand over a lump sum and begin receiving income within about a year. A deferred annuity has an accumulation phase and may be funded with a single premium (SPDA) or with flexible periodic deposits (FPDA).
The impossible combination and surrender charges
The single most-tested fact here: a flexible-premium immediate annuity cannot exist. You cannot make ongoing deposits into a contract that is already paying you income from day one — so all flexible-premium annuities are deferred.
Match the fact pattern:
- Lump sum + income now → SPIA (single premium immediate)
- Lump sum + income later → SPDA (single premium deferred)
- Periodic deposits + income later → FPDA (flexible premium deferred)
Surrender charges: Deferred annuities impose a declining surrender charge schedule (a 'surrender period,' often 6-10 years) to discourage early withdrawal and recover the insurer's acquisition costs.
Most contracts allow a free-withdrawal corridor — commonly 10% of value per year — without a surrender charge. Withdrawals still face LIFO income tax and the 10% pre-59½ penalty regardless of the surrender-charge waiver.
A 47-year-old wants to contribute varying amounts each month toward retirement income that will start at age 67. Which annuity structure fits?
Single premium immediate annuity (SPIA)
Flexible premium deferred annuity (FPDA)
Flexible premium immediate annuity
Single premium immediate deferred annuity
Which statement about immediate annuities is correct?
They accept flexible periodic premiums
They have a long accumulation phase
They are funded with a single premium and begin income within about one year
They never provide lifetime income
Sections you finish are checked off in the contents.