An immediate annuity is a tool for ensuring a regular income. It’s most often used to provide consistent retirement income. Whether it’s a good choice for your particular needs, however, depends upon your circumstances. Learn more about immediate annuities and how they work.
What Is an Immediate Annuity?
First, let’s have a look at what exactly is an annuity. An annuity is a contractual financial item that is issued by an insurance company. This product acts as a solution for the retired people to support their living. A person buys the annuity and they can keep on adding money until they are retired. Once the retirement period comes, they can then withdraw the money out of it, or they can withdraw it anytime they want.
In some cases, annuities are funded over the course of years before they start to payout. An immediate annuity, however, is typically purchased with one lump-sum payment and then starts paying out soon after you buy it.
For example, you sold your car as you are retired now and do not want to travel. After selling the car you put that money in the account in the form of an annuity. Now this money will keep on coming to you every month in fixed quantity so that you can support your living. This can keep on happening until the rest of your life, depends on the amount you are withdrawing every month.
What Immediate Annuities Offer
Annuities are basically a form of insurance which a person uses as a risk management tool for their investment. They use it as their retirement plan to get constant income every month until they die or until their beneficiary is alive. Remember, an immediate annuity is not a kind of investment, it is a kind of particular income. The key to properly using an immediate annuity is to understand what you are insuring and how to value the benefit being provided.
Whenever you purchase this immediate annuity contract, you get attached to an insurance company. This company will guarantee the stream of income which you will get depending on the period you choose. The insurance company calculates the amount of monthly income they can provide based on several factors, including:
- The type of annuity (fixed, variable, or indexed)
- The term of the annuity that you choose (life-only, joint life)
- Your age and gender
Types of Immediate Annuities
In Immediate annuities, you have a bunch of choices from which you can choose one. It all depends on how you want them. For example, whether you want to maximize your income now or you want to accept a lower payout for income now and then it would increase with the rise in inflation.
Similarly, if you want the most income today, a fixed payout option is the best. However, if you are seeing that the inflation is rising with every year you can go for the less income now plan.
Next comes the point of whether you want a variable payout or a fixed guaranteed one. The term fixed describes the constant amount of money coming to the account without any risk. However, when it comes to variable payout that means it won’t be consistent and constant. This actually says that it is connected with some stocks or market value and it increases when that particular stock increases and vice versa. There is a risk to this kind of immediate annuities as you would never be sure about it how much you are going to get the next month. The exact payout options vary by annuity policy, so review your options carefully before you choose.
Annuity term is a time which tells that for how long you will be buying and using that annuity. Or for how long this particular annuity is going to last. The term basically creates a period in which the investor gets his money either in fixed or variable format.
There are also joint-life options, which payout as long as at least one annuity owner is alive. There are also options that provide a return of principal so that if you die before the total amount you put in the product has been paid back out, any remaining balance will go to your heirs.
The older you are, the higher the monthly income you get. Insurance carriers use actuarial tables to calculate your life expectancy. The older you are, the fewer years they expect you to live. Payouts, therefore, are higher if you wait longer to buy your annuity.
Immediate Annuity Rates
Many annuity websites showcase immediate annuity payout rates. This is not the same as the rate of return or yield. You shouldn’t use an immediate annuity payout rate or a calculated rate of return to compare it to other investments. You buy annuities for the guarantees, not for the returns. The longer you live, the higher the return the annuity will provide.
Comparing the annuity rate of different companies is acceptable but don’t compare the rates with the investments. That would be like comparing apples with oranges.
When used as part of a holistic retirement income plan, the monthly income from an immediate annuity means other capital you have can be invested for long-term growth. Over time, an immediate annuity can create more total wealth. It also creates security. Those items have a value that can’t be measured by strictly looking at a rate of return.
Safety or Risky annuity demands
Well, this is a very important point that you need to think about before you choose an annuity. For example, whether you want constantly guaranteed pay or you are interested in getting higher income with some risk attached to it. With this extra money, you can go on a tour with your loved ones or can spend a holiday in your favourite resort.
Remember if you are healthy and have some side business, then the variable immediate annuity is the best option for you. But if you do not have any other income source, then do not fall for the risk, go for the fixed guaranteed ones.
What If you do not want the annuity?
You cannot change your mind once the annuity is signed and the contract is purchased. If you back off you will have to pay the surrender charges which will only cause you loss, nothing else.
If you decided you absolutely had to have a lump sum of money, you may be able to find an outside company to purchase your income stream from you at a discounted price.