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Your Guide to Immediate Annuities

An immediate annuity is a type of annuity that provides payment immediately after investment. Similar to monthly pension checks, immediate annuities provide a guaranteed stream of income well into retirement, and they are typically purchased with a lump sum payment. With immediate fixed annuities, payments are predetermined and do not increase with inflation or in the case of an unexpected event.

Types of Immediate Annuities

Immediate annuities, like other annuities, have several different product options. These include:

1)    Single Life Guaranteed Income

This type of immediate annuity guarantees that the annuitant will not outlive his or her income by providing regular payments until death. With this option, annuitants may choose to have their payments end upon death, designate a beneficiary or have it that their beneficiaries receive the remainder of the principal.

2)    Joint Life Guaranteed Income

A joint life immediate annuity provides steady income to joint annuitants as long as both are alive. Once one of them dies, the surviving annuitant still receives either partial or full payments depending on the contract’s terms.

3)    Period Certain Immediate Annuities

With this specific type of annuity, the annuitant is provided with guaranteed income for a certain time period. This means that there is a possibility the annuitant could outlive his or her payments. However, if death should occur before the payment period ends, any designated beneficiaries will receive payments until the term expires.

4)    Impaired Risk Immediate Annuities

These immediate annuities are specifically issued to medically impaired individuals whose life expectancies are shorter than the average person’s. Typically, it is cheaper for annuitants to purchase impaired risk immediate annuities, and the payments are larger. Individuals must provide proof of a medical illness before purchasing this option.

5)    Inflation Protected Immediate Annuities

With this plan, annuitants’ payments increase to keep up with inflation. Specifically, payments are designed to increase or decrease by a designated percentage yearly to correspond with changes in the Bureau of Labor Statistics’ Consumer Price Index.

Immediate Annuity Advantages

Immediate fixed annuities offer certain distinct advantages over other types of annuities and/or investments, including:

• Guaranteed income, either until death or for a specified period. This provides annuitants with stability throughout retirement, unlike stocks or bonds.

• Competitive rates of interest that are typically higher than bank CD’s. Greater amounts are also received than would be provided solely by interest, since the principal is returned with each payment.

• The fact that annuitants are not required to manage their own investments.

• Tax postponements on some of the earnings accrued when tax-deferred annuities are rolled into immediate annuities. Only the interest is taxable while the principal returns are nontaxable.

• Security of principal being that annuitants’ funds are backed by the issuing insurance companies and do not fluctuate with the financial market.

• Protection from creditors, since annuity payments are not under consideration when filing for bankruptcy.

That immediate annuity payments are not considered as part of an annuitant’s estate, which means that he or she may still be eligible to receive income-based government benefits, such as Medicaid.

Immediate Annuity Disadvantages

Although immediate fixed annuities offer conservative, guaranteed income investments, they also have a number of drawbacks that potential investors should be made aware of:

• Unless annuitants choose inflation protected plans, the fixed payments that they receive will erode with time and inflation.

• With straight life immediate annuities, if an annuitant dies relatively soon after investment, the issuing insurance company pockets the remaining money.

• Annuitants may not surrender their immediate annuities once they have made an investment. This type of investment requires a committed, long term investor. 

• With immediate annuities, annuitants are unable to increase their payments.

Who Should Invest in Immediate Annuities?

Individuals who are on the verge of retiring and have a large sum of money should consider investing in immediate annuities. Immediate annuities can provide retirees with a stable source of income for a certain amount of years or until death. Conservative investors should also consider investing in this type of annuity because their principal amounts are backed by the issuing insurance companies. Investors are also guaranteed steady returns and competitive rates of interest. Unlike stocks, immediate annuities are low risk for investors, with the issuing insurance companies being held responsible for any financial mishaps.

All Things Considered About Immediate Annuities

Immediate annuities can provide relief to those who are worried about running out of retirement income by providing them with guaranteed stable payments either for life or for a certain, predetermined amount of time. Before investing, however, individuals should consider:

Whether or not their selected payment options will cover their income needs.

The fact that with life only immediate annuities, it may take many years before annuitants receive their investment returns.

Regardless, with the guidance of a financial advisor, most individuals are able to choose an immediate annuity policy that suites their needs entirely. Before purchasing an annuity, prospective investors should consult their families along with conducting thorough research.

Disclaimer

Annuities are not a deposit in any bank. They are not FDIC insured by any Federal Government Agency. Guarantees are based on the claims paying ability of the issuing company. The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the claims-paying ability of the issuing insurance company. The principal amount of payments of an annuity purchased with funds from a qualified retirement plan may be taxable. With either systematic withdrawals or free withdrawals you will still be subject to regular income taxes, as well as the 10% tax penalty on early withdrawals prior to age 59 1/2. You may also incur surrender charges on amounts withdrawn in the early years of the contract.