Immediate Annuities

Immediate annuities are policies purchased with a lump sum contribution. This is then converted into a guaranteed income stream that can last for a set period of time or a lifetime. These income payments begin immediately after the deposit of the initial funds. In this article, we will go over the different types of immediate annuities, as well as their benefits and disadvantages.

Types of Immediate Annuities

Variable Immediate Annuities

A variable immediate annuity works like an investment account. The amount you earn on your principal investment is based on market performance. The insurance company holds your principal in subaccounts that allow you to invest in groups of assets. These groups are made up of stocks, bonds, and money market funds. Due to this structure, if your investments do well, your funds will increase. However, if the market is in bad shape, your principal may decrease. Just like with an investment account, tolerating slow periods may lead to a higher growth potential over time. This can serve as a form of inflation protection, helping to keep the buying power of your investment high.

Fixed Immediate Annuities

A fixed immediate annuity gives the guarantee of a set interest rate on your principal. It mitigates risk. But it will not provide inflation protection. You sacrifice potential gains for consistent, guaranteed interest.

Index Immediate Annuities

With index immediate annuities, interest payments are linked to an index, like the S&P 500. However, there are set limitations on gains. But there is a limitation on losses as well. These provide protection guaranteeing you will not lose any of your principal.

Term Immediate Annuities

With term immediate annuities, you only receive payments for a set period of time, versus over your lifetime. Generally, this period ranges between 5 and 20 years. If you die before this period ends, you name a beneficiary who will receive benefits for the rest of the term.

Lifetime Immediate Annuities

Unlike a term immediate annuity, with a lifetime immediate annuity, you will receive payments for the rest of your life. If you do a joint annuity with your spouse, the payments will continue until the death of the second spouse. In this instance, payments will most likely be smaller than for an annuity for a single person.

Benefits

It is important that you understand the benefits that immediate annuities can provide. First, there is no delay in receiving funds, you are able to receive payments right away. Second, according to how you set it up, you have the potential to receive income for the rest of your life. Third, these policies are highly customizable. This allows you to add on riders for things like inflation protection and inheritance. Fourth, if you utilize a fixed or indexed annuity you can protect your funds from market losses.

Disadvantages

As with all investments, there are potential disadvantages that you need to be aware of. First, there tends to be a high up-front cost. This is between the initial principal and insurance company fees. Second, you could potentially receive less than you put in if you die early. If you have a lifetime benefit without a rider you could die before the full amount you put in is paid out to you. Third, the payments you receive could lose value to inflation.

Is An Immediate Annuity the Right Fit

There are several factors you will want to take into consideration to see if an immediate annuity is the right choice for you. First, you will want to be sure you are ready to tap into your savings and convert them into an income stream. Second, if you do not have other sources of guaranteed income, an immediate annuity can help fill that gap. Meet with a qualified insurance agent who can help you to verify if this is the right choice for you.

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