Understanding Immediate Annuities
Immediate annuities are the most simple type of annuity to understand. You pay the insurance company a lump sum of money to purchase a contract, in return they guarantee you a series of payouts for the term of the contract. Depending on your particular contract, these payments can be made for a set amount of time or for the remainder of your (and even your spouse’s) life.
The Basics of Immediate Annuities
The payments from an immediate annuity will be based on several factors include:
- The initial lump say payment amount
- The interest rate specified on your contract
- Your payment frequency rate – set time frame/lifetime payments (determined when you purchase)
- Your life expectancy (based on several health factors including current age and gender)
- The date chosen for your first payment
- Additional features that are part of your contract
Income payments from an an immediate annuity either be level or can increase over time for a fixed number of years or through the remainder of your lifetime (whichever is longer). An immediate annuity is a great option if you’re looking for predictable, reliable income to cover expenses during your retirement, but do not offer any potential for substantial growth like a fixed index annuity.
Income payments from an immediate annuity will be taxed at normal income tax rates instead of lower capital gains rates.
Keep in mind when purchasing an immediate annuity that there is no accumulation phase, meaning you must annuitize immediately to begin receiving income payments. Once you have annuitized with a Life Only option, you will forfeit access to your assets. At death, your money that is under contract, that could potentially be left to your family, will be forfeited to the issuing company.
Advantages of Immediate Annuities
One of the biggest benefits to immediate annuities is that they can be setup to begin paying out immediately, which can help retirees prevent outliving their retirement nest egg. Immediate annuities allow you to create a lifetime income stream or an income for a set number of years, which can provide comfort in knowing that you’ll have a stream of income coming in to help pay bills, health care expenses or simply day to day life expenses.
Disadvantages of Immediate Annuities
Immediate annuities can have certain disadvantages depending on whether they are fixed or variable. These disadvantages include high fees with a variable annuity, or inability to keep up with inflation with a fixed annuity.
If your immediate annuity is fixed, you may receive payments for the remainder of your life or for an extended bad. Since the annuity is fixed, it may not keep up with inflation over the course of your lifetime, should you live longer than you planned for, these payments may not be worth nearly as much as they were when you first started receiving them.
Variable immediate annuities on the other hand will allow you to keep up with inflation, but there are no guarantees. Your payouts may vary as your account values increase or decrease over time, based on the performance of your portfolio. Should the markets fall, your variable immediate annuity may not provide enough income to support your needs.
Are Immediate Annuities Right for Me?
Immediate annuities work best for people who want to have an income stream coming in regardless of how long they live and an immediate annuity can be a solution for this. Immediate annuities will help you create an income stream to cover daily living expenses.
As with fixed index annuities, immediate annuities are an option for people who are concerned about outliving their retirement income. Should you consider purchasing an immediate annuity, consider allocating additional savings to another investment product as well to accommodate for added expenses or unexpected losses.
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