What are Immediate Annuities?
Although immediate annuities are common, many people have no clue what they are so in this article, we wanted to provide an overview. Simply put, immediate annuities are investments or legal financial contracts often used for retirement planning. With this, an insurance company sells an annuity in exchange for the annuity holder paying the insurance company a specific amount of money. Immediately, payments would be paid out from the insurance company to the annuity holder, which are typically for life although they can also be set up to pay out for a specific amount of time.
In most cases, immediate annuities are used once a person retires at which time they are paid a lump sum of money. A perfect example of how immediately annuities work is that if an individual were paid a large payment from a pension or retirement fund, that person could purchase an immediate annuity. From there, the insurance company would send the person payments every month regularly and in the same amount so the money now becomes consistent income until death.
However, immediate annuities can also be purchased by people not nearing retirement but those who have come into a large sum of money. For instance, if someone won the lottery and wanted to have steady income for life without blowing the money, then an immediate annuity could be purchased and in return, regular payments would be made to the annuity holder. The amount of payment the individual receives would depend on a number of factors such as the person’s life expectancy, rate of interest expected, and how often payments would be made.
When immediate annuities are purchased, one or more beneficiaries would be named, just as with any investment. Then, since the amount of payout is calculated using the annuity holder’s life expectancy, sometimes funds are forfeited as a means of counterbalancing money lost if the annuity holder were to outlive his or her expected life span. As with most legal contracts, immediate annuities can be set up in a variety of ways.
In addition to choosing more than one beneficiary if wanted, immediate annuities could also be purchased as joint accounts. In this case, joint distribution of funds would be paid out to two people instead of one but payments would stop upon the death of the first or second person. Therefore, joint immediate annuities come with more risk than annuities taken out by an individual. Regardless, at minimum payments would be for the undistributed remainder of money minus any partial withdrawals.
Even the terms of immediate annuities vary, which in turn would affect the actual amount for purchasing the annuity and for the amount paid to the annuity holder. For instance, when immediate annuities include a death benefit, the contract would have a lower periodic distribution for annuity payments or a higher immediate payment. In other words, money paid out could be paid in larger amounts of money over a shorter amount of time or smaller amounts of money for a longer period.
In the past few years, the concept on which variable annuities are based has now been added to immediate annuities. Because of this, level of the regular payments would be replaced with a payout intended to match the performance of an equity portfolio that would be chosen by the annuity holder. Many of the indexed annuities sold, which include portfolio values that vary with returns to indexes based on market performance would also be for immediate annuities.
For anyone thinking about investing in immediate annuities, it is essential to consider potential long-term consequences. The reason is that once the annuity is purchased, the individual would not be able to get his or her money back nor switch to a different type of annuity later down the road. Because immediate annuities lock a person and that person’s money into a legally binding contract with set interest and payments for life, serious thought is needed before making the commitment.
