What Are Immediate Annuities?

They are called “instant” annuities since you receive annuity income payments as soon as your money is deposited.

The annuity provider promises consistent income for the duration of the contract in exchange for an upfront investment from you. Annuities are a desirable alternative for certain retirement investors because of the income guarantee, but they have additional charges. There are costs to be aware of, and taking your principal investment out of an annuity contract can be costly. You might be subject to steep fines if you need to withdraw more money than your standard annuity payout for a particular month or year.

What types of immediate annuities are available?

There are three varieties of immediate annuity contracts: variable immediate annuities, fixed immediate annuities, and immediate index annuities. The schedule for annuity income payments varies depending on the type. The returns that annuities offer serve as the primary criterion for categorizing them.

By how long their payments last — over a predetermined period or a lifetime — annuities can also be divided into additional categories. This indicates that you might have a fixed-term or a variable lifetime immediate annuity.

You can buy an annuity with a single premium or make payments on a regular or discretionary schedule over time. Your payment alternatives are spelled out in the contract you sign. Immediate annuities, for example, are typically single premium purchases, while payments for a deferred annuity may be made over time.

Variable Immediate Annuities

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 inflation rate.

Of course, the amount you receive may also decrease at any time if investment performance declines. Historically, the equity markets have been an excellent 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 expected. But they do depend on the claims-paying ability of the annuity company.

Fixed Immediate Annuities

A fixed immediate annuity provides a steady, reliable income stream for your lifetime, for two lifetimes, usually yours and your spouse’s, or for a particular term or period.

As with other annuities, the income you receive depends on the size of the premium, your age or joint age, 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 give 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. Still, the money you get from the annuity will not.

For some people, though, being assured that a specific amount will arrive regularly is more appealing than taking responsibility for managing their assets or worrying 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.

Index Immediate Annuities

Fixed index annuities, also referred to as index instant annuities are amid variable and fixed annuities. They earn interest at a rate determined in part by the performance of a specific stock market index, often the SP 500, not including dividends. If the index gains value during the particular period set in the contract, your indexed account is credited with a return linked to that gain. This provides an opportunity for your account value to grow. If, on the other hand, the index loses value in the specified period, as it may do, your indexed account is credited with 0% interest rather than a negative return.

Issuers can use several methods to identify the change in the index, which is the primary factor in determining the interest to be credited to their contracts. A key difference is where the start and end points that book-end the change are set. Because you choose the crediting strategy for your account and can change strategies annually or bi-annually, it’s wise to investigate how each of the approaches works.

The calculation may be done each month or each year, with any potential gain credited to your account. Or the calculation may be done only once, at the end of the annuity’s term. In that case, it is the difference between the index levels on the days that start and end the index period that determines your return.

What are the benefits of an immediate annuity?

Many significant benefits come with an immediate annuity.

• First, immediate annuities start making payments immediately. Since there is no time lag between your initial payment and the payout, it can help individuals avoid outliving their savings.
• You can set up your immediate annuity to pay out income monthly, quarterly, semiannually, or annually. That can be a significant advantage over other income-producing investments, such as bonds, which typically pay on a fixed, semi-annual schedule.
• With a fixed immediate annuity, you secure a lifetime income stream (or a specific number of years, if you choose). For retirees who don’t want to worry about whether they will have enough money to pay the bills each month, knowing that you can rely on a guaranteed income stream can be a benefit.
• 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.
• As a result, the payments may be higher than what you could typically get by investing your money independently in secure investments.
• Finally, there are no annual account maintenance or management fees with immediate annuities.

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. In addition, an annuity’s lifetime income is an essential factor in ensuring that you won’t outlive your assets. Annuity income may also make you more comfortable investing your other retirement assets more aggressively.

What are the disadvantages of an immediate annuity?

Immediate annuities may also have some difficulties.

• First, annuities paid out immediately are not liquid. Second, you lose control over the amount you paid for the annuity once the insurance company receives the cash and begins paying you. Third, it can cost you money to break the agreement if you have an emergency and need to access the money.
• Moreover, inflation may not reduce your payments if you have a variable immediate annuity, but it also may not. Finally, budgeting might be challenging because payments fluctuate monthly based on how well your underlying investments perform.
• Possibly lower returns if you pass away earlier. If the payout is for a specific term, the beneficiary will receive income for that period. If it is a lifetime payout, the assets revert to the issuing company, where they are used to provide income payments to other annuitants who live longer than expected. The guarantee of lifetime income based on average life expectancy assumes that just as some people will live longer, others will die sooner.

What Are Immediate Annuities? by Inna Rosputnia

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