Payout annuities convert your lump-sum premium to an income stream.
Immediate annuities offer something no other retirement plans do: the opportunity to start receiving income right away. That’s why they’re sometimes described as income annuities.
Since you buy an immediate annuity by paying a single premium, this type of annuity can be an attractive choice if you collect a one-time pension payout, sell a business, inherit money, or receive an insurance benefit and want to convert these assets to a source of regular future income.
What’s more, you can purchase an immediate annuity and convert your cash to income at a time that suits you. That’s one way they differ from a deferred annuity, which you should consider a long-term commitment to accumulating retirement assets.
Looking at the benefits
You can set up your immediate annuity to pay out income monthly, quarterly, semiannually, or annually. That can be a big advantage over other income-producing investments such as bonds, which typically pay on a fixed, semi-annual schedule. And remember that immediate annuities provide an additional benefit, since part of each income payment is return of principal on which you owe no tax.
One criticism sometimes leveled at fixed immediate annuities, and annuities in general, is that you lose access to, and control over, your assets. However, some immediate annuities let you commute your contract, which means you can accelerate your payments, or take some or all of the cash value minus expenses in a lump sum at any point.
A fixed immediate annuity provides a steady, reliable stream of income for your lifetime, for two lifetimes, usually yours and your spouse’s, or for a certain term, or period of time.
As with other annuities, the income you receive depends on the size of the premium, your age or joint ages, the interest rate, and the number of guarantees that are provided. For example, a payout guaranteed to last as long as you and your spouse are alive will provide a smaller payment than one paid solely for your lifetime.
One issue with this type of annuity is that fixed income is vulnerable to inflation, since the cost of living will most likely increase over your lifetime but the money you get from the annuity will not.
For some people, though, being assured that a specific amount will arrive on a regular basis is more appealing than having to take responsibility for managing their assets or worry about getting smaller payments in some periods. For example, a surviving spouse who inherits a substantial sum can avoid having to make investment decisions by converting the money to a fixed immediate annuity.
Remember that the older you are when the income begins, the higher the payment amount. That’s because more of the principal is repaid each time.
Variable immediate annuities combine the assurance of regular income with the advantage of continuing to be invested in equity markets. You choose among the investment funds offered through the contract. That means the amount of income you receive may increase over time, so that you’re in a better position to keep pace with or exceed the rate of inflation.
Of course the amount you receive may also decrease at any time if investment performance declines. Historically, however, the equity markets have been a good way to beat inflation over the long term. Most variable immediate annuities offer the same types and varieties of investment accounts that deferred contracts provide.
Most also allow you to choose the benchmark rate by which your portfolio’s performance will be measured.
In an immediate annuity, the death benefit protection is in the form of continuing payments to your beneficiaries for a specified number of years or a cash refund of the unpaid contract value remaining at your death. These assurances offset the concern that the issuing company might not pay out all you have invested if you die sooner than you expected. But they do depend on the claims-paying ability of the annuity company.
Generally speaking, an immediate fixed or variable annuity works best as part of a package that includes income from Social Security, your qualified retirement plans, IRAs, and your other investments. The lifetime income that an annuity provides may be an important factor in helping to ensure that you won’t outlive your assets. Annuity income may also make you more comfortable about investing your other retirement assets more aggressively.
What Are Immediate Annuities? by Inna Rosputnia
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