What is the Accumulation Period of an Annuity?

Annuities have two phases: the accumulation phase (also called the accumulation period) and the payout phase. In the accumulation period, your premiums earn interest and grow. The accumulation period ends when you choose to annuitize or withdraw your funds.

During the accumulation period, your premiums grow tax-deferred as interest credits compound. If you have a flexible premium annuity, you can keep adding contributions during this time. Below, we explain what the accumulation period means for your annuity plan and retirement income.

What Happens During the Accumulation Period?

When you buy an annuity from a life insurance company, the accumulation period begins when you pay your premiums. During this period of time, your annuity earns interest. If you buy a fixed annuity, you’ll earn a guaranteed minimum rate of interest over the term that you select. If you choose a variable annuity or a fixed-indexed annuity, the interest rate will vary based on the performance of the investments you chose (read more about the details of different types of annuities here).

The accumulation period is also when you fund your annuity. You can usually choose to fund your annuity with a lump sum payment (single premium annuities) or with regular premium payments over a number of years (flexible premium annuities). If you choose a flexible premium annuity, you can make additional premium payment installments for the entire time period of the accumulation phase. Each time you add premiums, the accumulated value of the annuity account increases.

The accumulation period ends when you annuitize. Annuitization means converting your annuity into a stream of guaranteed income payments. When you annuitize, you can no longer add money to the annuity. Instead, you simply receive your annuity payments for the amount of time specified in your contract.

Note that there are rules about making early withdrawals from your annuity account. Withdrawing your money during your annuity’s surrender charge period may result in surrender charges from your annuity company. You may also face tax penalties if you withdraw from your annuity before you turn 59½.

What Types of Annuities Have an Accumulation Period?

Deferred annuities have accumulation periods. Deferred annuities are best for individuals who have some time before they need their retirement income stream to start. Every deferred annuity has an accumulation period, whether it is a fixed annuity, a variable annuity, or an equity-indexed annuity.

Not all annuities have an accumulation period. Immediate annuities, also known as income annuities, skip the accumulation period. Instead, they annuitize when they are purchased. That means that the payout period and annuity income payments begin right away—usually within a year. These are best for individuals who are already in retirement and want their periodic payments to begin soon after they buy their annuity.

Longevity annuities (also known as deferred income annuities) begin paying you income on a date you choose, typically many years into the future. As the name suggests, the product is a hedge against outliving your money if you live longer than anticipated. While the annuity account value does not accumulate interest during that time, the monthly payments are larger than they would be if you annuitized right away, because the insurance company has many years to invest the money prior to distributing it to you.

Insurers cannot unilaterally surrender your contract. However, they may assess surrender charges according to the schedule you agreed to at purchase. If liquidity is a priority, review the free‑withdrawal amount, the surrender period length, and whether market value adjustment (MVA) clauses apply.

In most contracts, the annuity owner (or contract holder) can surrender or partially surrender the annuity during the accumulation period. Surrenders are subject to the insurer’s surrender-charge schedule and any free‑withdrawal allowance in the contract. If the annuity is held in a qualified account, taxes apply to gains and a 10% IRS penalty may apply to taxable distributions made before age 59½.

How Long are Annuity Accumulation Periods?

The length of the accumulation period depends on when you begin to withdraw your funds.

It can depend on the term you choose. For example, Canvas Annuity sells fixed-annuity products with terms of three, five, and seven years. Assuming you didn’t surrender your contract, the accumulation period would be at least five years.

You could choose to not annuitize at the end of those five years. You could even choose to roll your annuity account over into a new five-year term annuity. In that case, the total accumulation period would be two, five-year terms or 10 years total.

So, with Canvas’ annuities, there is a term for the accumulation period, but you can roll it over to a new guaranteed rate term. This effectively extends the accumulation period by the new term. Note that you can also annuitize during the Canvas MYGA term, so the accumulation period could be shorter, too.

Considerations Before Buying an Annuity with an Accumulation Period

Annuities with accumulation periods—deferred annuities—earn interest over time. That makes them a powerful way to build up your retirement savings. Fixed-annuity rates are usually relatively high compared to other safe places to put your money—CDs, bonds, etc. They also offer a guaranteed income in retirement and benefits like tax deferral. Together, the benefits of deferred annuities are compelling. This is why they are one of the most popular insurance products among individuals approaching retirement.

Annuities with an accumulation period may not be for everyone. Here are some of the reasons they may not be appropriate for your circumstances:

• You need liquidity. Annuities are not very liquid. If you need to take your money out of an annuity early, you may have to pay tax penalties or surrender charges. If you’re looking to have your savings easily accessible, annuities may not be the best choice.
• You’re investing in the short term. Because they are relatively illiquid, deferred annuities are long-term products. They’re designed to help you steadily grow your savings until you retire. If you are looking for shorter-term options to grow your money, annuities may not be appropriate for you.
• You prefer higher potential growth. The interest crediting rates for deferred annuities are quite good—and Canvas has some of the best annuity rates in the industry, but higher risk investment options like stocks, mutual funds, or index funds can provide better growth. (But remember, you could lose money with these investments, too. With fixed annuities, your money is guaranteed to grow unless you withdraw your money early.)

If you’re not sure, consider consulting a financial professional like a financial advisor or investment planner. These can help you find the right products for your particular circumstances and financial goals.

Annuity Accumulation Periods Grow Your Money

The accumulation period of an annuity is where the growth happens. You can continue to contribute premiums and earn interest and your annuity account increases in value. When it’s time to annuitize, the more money you have accumulated, the greater your retirement income payments.

Deferred annuities, the kind of annuities that have accumulation periods, are best for people who want a safe way to grow their nest egg over a long period of time. They may not be as good for those who need a short-term way to invest their money or who want higher potential growth (and higher risk).

If you are looking for a safe way to grow your retirement savings, then consider a fixed annuity from Canvas. These are deferred annuities with an accumulation period, so your money will grow with a guaranteed minimum interest rate over the term you select.

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