An FPDA is a Flexible-Premium Deferred Annuity. As the last two words indicate, the contract provides for the accumulation of funds to be applied at some future time designated by the contract owner to provide an income based upon the life of the annuitant(s) (or for a certain term). Premium payments are flexible—they can be paid as frequently or infrequently as the owner desires. They can be paid monthly, annually, or one or more years can be skipped as there is no specified contribution amount or required payment frequency. Most insurers do set a minimum payment level for administrative purposes—typically this runs from $25 to $50 for most companies.
Most FPDA contracts have no front-end load. Annual loads vary but many are under $50 per year. Some companies charge loads based on a percentage of each contribution, as a percentage of the annuity fund balance, or as a percentage of both. The insurer often does charge a back-end load (a surrender charge) when a cash withdrawal in a year exceeds a stipulated percentage of the fund balance—typically the annual free withdrawal amount is 10 percent of the premium deposits or contract value. The surrender charge will typically reduce year by year to 0 percent by the seventh or eighth contract year.
With fixed FPDAs, insurers guarantee minimum interest rates (typically 3 to 4.5 percent) but usually pay much higher rates. The actual rate will depend on the earnings rate of the insurer. Current rates have ranged from 5 to 11 percent in recent years but are subject to rapid change as interest rates trend upward or downward (although the crediting rate is often set on the contract anniversary date and is valid for the entire year). Focus should be placed on the net (after loads and charges) return earned, over the entire expected holding period, when comparing fixed annuities.
Most variable annuities are FPDAs. Fixed annuities are often FPDAs, but some types do not have flexible premiums, or are immediate annuities. Equity-indexed annuities are virtually always deferred annuities, but often do not have flexible premiums.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM