Immediate Annuities Learning Guide
Immediate annuities are a type of insurance product that provides immediate income after an initial investment. The initial investment is generally referred to as a “lump sum premium.” Much like monthly pension checks, immediate annuities can offer a guaranteed income stream well into retirement, and are generally purchased by means of a lump sum payment. With immediate fixed annuities, payments are set and generally do not adjust with inflation or in the case of an unanticipated event, although there are more and more different types of immediate annuities offered by insurance companies regularly and for an additional cost a rider that offers such an adjustment may be available.
Different Types of Immediate Annuities
Discerning between the 5 main different types of immediate annuities
Immediate annuities, similar to other annuities, have quite a few different product options.
- Single Life Guaranteed Income
This immediate annuity guarantees that the insured or annuitant will not outlive his/her income by providing them regular payments until they pass away. With this option, annuitants have the choice to end their payments upon death, assign a beneficiary, or set it up for their beneficiaries to receive the remainder of the principal, although the amount of money the annuitant will receive will vary based upon which option is selected.
- Joint Life Guaranteed Income
A joint life immediate annuity offers a steady income stream to joint annuitants (two individuals) as long as both annuitants are still living. When one dies, the surviving annuitant continues to receive either partial or full payments depending on the terms of the contract.
- Period Certain Immediate Annuities
This type of annuity supplies the annuitant with guaranteed income for a certain time period. There is a chance, with this type of annuity, that the annuitant could outlive his or her payments. If, by chance, the annuitant does pass away before the payments are scheduled to end, the beneficiaries on the account will receive those payments until the term expires. These are typically offered in increments such as 5 years, 10 years, or 20 years.
- Impaired Risk Immediate Annuities
Impaired risk annuities are immediate annuities that are specifically issued to medically impaired individuals whose life expectancies are shorter than the average person's. Typically, these types of annuities are less expensive to purchase, and the payouts are larger. Proof of a medical illness must be presented before purchasing this option. An insurance company will underwrite the individual, very similar to how an individual undergoes underwriting when purchasing a life insurance contract. The insurance company will make an estimation on the person’s life expectancy. These annuities are also commonly referred to as “Medically Underwritten SPIA’s” (Single Premium Immediate Annuity.)
- Inflation Protected Immediate Annuities
With this type of plan, the payments vary with inflation rates. Payments are specifically designed to adjust as the inflation rates go up or down by a particular percentage annually corresponding with the changes in the Bureau of Labor Statistics' Consumer Price Index.
Benefits of Immediate Annuities
Some advantages to purchasing immediate annuities
A few of the distinct advantages to owning immediate fixed annuities as opposed to other types of annuities and/or investments, include:
- Guaranteed income, until death or for a predetermined time period. Annuitants are provided with income stability during retirement, dissimilar to stocks or bonds.
- Competitive interest rates that are on average higher than bank CD's; in turn annuitants receive higher payments than would be provided exclusively by interest…since principal is returned with every payment.
- Annuitants are not obligated to handle their own investments.
- Earnings accrued with some tax-deferred annuities are rolled into immediate annuities thus providing tax postponement. Principal returns are nontaxable however the interest earned is taxable.
- Annuitants’ funds are backed by the insurance company issuing the annuity thus providing some level of security of principal without being exposed to the sometimes volatile stock market.
- Bankruptcy protection…in most states, annuity payments are not under consideration when bankruptcy is filed therefore protected from creditors. Laws may vary depending on the state bankruptcy is filed in, so before purchasing an annuity for this reason please consult with a qualified attorney.
- Immediate annuity payments are not currently considered to be part of an annuitant's estate, which means that an annuitant may still qualify to receive income-based government benefits, such as Medicaid.
Drawbacks of Immediate Annuities
Some disadvantages to purchasing immediate annuities
Although there are many advantages to owning an immediate fixed annuity like offering conservative, guaranteed income investments…they are also a binding contract and have carry a number of drawbacks that potential investors ought to be aware of:
- If annuitants don’t choose inflation protected plans, their fixed payments will erode with time and inflation.
- With lifetime immediate annuities…if the annuitant passes away fairly soon after his/her investment, the issuing insurance company pockets the remaining money.
- Once the investment is made, a contract is formed, and annuitants are unable to surrender an immediate annuity. A long term investor is required for this type of investment.
- Annuitants are unable to increase their payments with immediate annuities.
Who Might Consider Purchasing an Immediate Annuity?
Find out if immediate annuities are right for you
Individuals who are on the verge of retiring should consider speaking to an advisor to weigh the benefits and drawbacks of investing in immediate annuities. Immediate annuities can provide retirees with a stable source of income for a certain amount of years or until death. Conservative investors should also consider investing in this type of annuity because their principal amounts are backed by the issuing insurance companies. Investors are also guaranteed steady returns and competitive rates of interest. Unlike stocks, immediate annuities are low risk for investors, with the issuing insurance companies being held responsible for any financial mishaps.