What is an Immediate Annuity?

We’ve gone over the basics of annuities in addition to fixed annuities and longevity annuities. In this blog entry, I’ll go over what an immediate annuity is and why it might be right for you.

Immediate Annuity (Image: Flickr)

As opposed to deferred annuities, immediate annuities allow you to start receiving payments from your annuity immediately after purchasing it. Immediate annuities can either be fixed or variable: fixed annuities provide you with a constant, secure stream of funds, while the value of a variable annuity varies with the investments in which the money is tied.

Immediate annuities are generally sought by those who have already retired or those who are nearing retirement. Purchasing an immediate annuity allows a retiree to start supplementing his or her income with regular payments. Immediate annuities cannot be outlived, as opposed to other annuities, which means that the annuitant will receive payments from the annuity for the rest of his or her life.

While other types of annuities can be purchased with periodic payments, immediate annuities are generally purchased exclusively with lump sum payments because of the nature of the annuity. A large portion of the money within the immediate annuity is not taxable because of the exclusion ratio.

While other types of annuities may be ideal for those who are looking to take a risk in the hopes of a reward, immediate annuities are generally for those who want the maximum amount of security for their money. Although you could potentially make larger returns by investing your money in the bond market, for example, immediate annuities leave your money safe and secure so that you can go into retirement confidently. Retirees that want money to be passed on to their heirs should also be careful with the payout options on their annuities. If the annuitant selects life-only annuities, the insurance company receives the rest of the value of the annuity upon death.