Immediate Annuity

There are many different types of annuities. These contracts provide the annuity owner with guaranteed and steady income, usually for his lifetime. Immediate annuities provide distributions or income soon after the owner sets up the annuity. Immediate annuities are not a good fit for everyone, but in most cases, they help to supplement the income of a retiree. When setting up an immediate annuity, you need to be aware of the terms of the contract and understand all aspects of the annuity.

Immediate Annuity Summary

  • Purchased with a single lump-sum payment.
  • Income payments begin within 13 months.
  • Are good for those who are in retirment.
  • Total sales of immediate annuitties were $8 billion in 2010.

How Immediate Annuities Differ from Deferred Annuities

Immediate annuities offer regular payments to the owner almost immediately after the contract is signed and funded. Deferred annuities, on the other hand, delay the distribution of payments until a specified time, usually at retirement age. Deferred annuities offer long-term growth for the owner. By the time the annuity starts paying distributions, it has grown in value. The regular distributions help to financially support the owner during his retirement years and until his death. The main difference between immediate annuities and deferred annuities is the time between setting up the annuity and getting the first distribution.

How Do Immediate Annuities Work

All annuities work in similar ways. The annuitant (or annuity owner) sets up an annuity, deposits money into the account and then waits for the distributions to begin. With immediate annuities, (also known as instant annuities), you set up an annuity contract with a financial institution. The only way to fund the immediate annuity is with one lump-sum payment. The money is usually the accumulated savings of the annuity owner.  In exchange for the lump payment, the financial institution guarantees you regular payments.

With immediate annuities, once the payments begin they continue until the annuitant’s death or for a set number of years. The amount of the payments depends on whether you choose a fixed or variable annuity, and whether you choose a lifelong annuity or certain term annuity. Age and gender are also important because these factors determine life expectancy. After death the annuity distributions pass on to the named beneficiary.

Who Are Immediate Annuities Right For

The immediate annuity is best for those who have a large sum of money to invest and who also want lifelong payments to start soon. In many cases this describes a person at retirement age. Most people choosing an immediate annuity want to convert their savings into regular payments that last until their death. Immediate annuities are a good investment for those who want a low-risk investment and guaranteed income for life. Such an individual also cares about financial security for his investment. Immediate annuities are also for people who want to roll-over their pension fund, company stock or 401(k) into an annuity to reduce risk of income.

Top 5 things to consider when decided to purchase a immediate annuity

  1. Financial health of the financial firm: When looking for a company to set up your immediate annuity, or any type of annuity for that matter, choose a company that is financially sound. The credit score tells you a lot about a company’s finances. A high rating from credit reporting agencies tells you that the company is stable.
  2. A Fixed or Variable Annuity: Fixed annuities provide regular payment at the same level over the course of the annuity. Variable annuities pay variable rates, but there is a guaranteed minimum payout.
  3. Loss of Financial Control: It is a good idea to use immediate annuities for only a portion of your retirement income. The reason is simple. As a contract, immediate annuities are irrevocable. Once you deposit the money into the annuity, you cannot cash out. You no longer have control over the money.
  4. The Amount of the Payments: Most people with annuities want a high return on their money. Financial institutions can calculate what your payment will be based on the amount in the annuity, whether fixed or variable and the life expectancy of the annuity owner. The interest used to calculate the amounts is often higher than the prevailing CD (certificate of deposit) rates. The annuity payments are often higher than the returns on CDs or Treasury bonds or bills because some of the initial deposit is returned with each payment.
  5. Investment Limits: There are no limits on how much money you can invest in an immediate annuity. But there are limits to how much your state will guarantee the safety of your investment. For most states the maximum is $100,000. Some states go up to $500.000. The best way to invest in an annuity without worrying about such matters is to spread your investment amount among different financial institutions.

Immediate annuities offer quick payments for those at or near retirement age. The fast return on investment is appealing to may people who want an income for the rest of the lives. Consider immediate annuities if you have a large sum of money to invest and want to keep this money secure while also receiving regular payments.