Immediate Annuities

An immediate annuity is basically an exchange between an insurance company and an individual, or the buyer of the annuity. The buyer purchases the immediate annuity in a single deposit. The insurance company pays the buyer a monthly sum, or income, for the rest of the buyer’s life. This series of monthly payments start immediately after the date the deposit on the immediate annuity is made. In exchange, the buyer surrenders to the insurance company his rights to receiving his deposit back as a lump sum.  

The key thing to know about an immediate annuity has made its first payment, it generally can’t be cashed in ever again.

Arranging and immediate annuity

An immediate annuity can be arranged such that payments extend over a set period of years, or even over your entire lifetime. For those with dependents such as a spouse or children, you can even tailor-fit your immediate annuity to make payments for your lifetime and that of your dependent. Of course, the amount of your annuity payment is based on several factors: the amount at which you bought the annuity (purchase payment), the type of payout and its length, personal factors such as age, and whether you choose to buy a variable or fixed annuity.

When considering an immediate annuity as a retirement plan or investment vehicle, it is always best to consult a trusted financial advisor.

Sources of immediate annuities
Immediate annuities can be bought with funds from a number of possible sources, which include:

a)    a maturing Certificate of Deposit (CD);
b)    funds accumulated in a Deferred Annuity account; or
c)    funds from a tax-qualified defined benefit or profit-sharing plan
d)    funds from an IRA account

Advantages of immediate annuities

There are many advantages of using immediate annuities as an investment vehicle.

First of all, immediate annuities provide financial security. This is its heftiest advantage. Immediate annuities are foolproof means of providing a stable, steady and regular income to the buyer for his lifetime. Payments from an immediate annuity can be guaranteed for a set period of years, and may even be arranged such that the buyer will never outlive his payments. A lifetime income despite whatever economic situation is no joking matter, especially when we consider job security and unforeseen circumstances that may diminish our ability to generate income. However, do keep in mind that immediate annuities are not insured by the FDIC or by any other government agency. It is not a deposit or other obligation of a bank and is not bank guaranteed.

Secondly, immediate annuities are easy to manage. Unlike other investment vehicles, such as stocks, commodities and similar financial assets, immediate annuities do not depend on the market situation at the moment. A buyer of an immediate annuity does not have to watch markets to find out how much his monthly annuity payment will net him. He will not have to manage a portfolio of investments or report interest or dividends. He simply has to receive a monthly sum from the insurance company with which he arranged his immediate annuity. It’s that simple.

Thirdly, immediate annuities have high returns. This is because interest rates used by insurance companies for immediate annuity payments are typically higher than CD or Treasury rates. Also, part of your principal payment is returned in each monthly payout, so you receive a greater amount than just the interest on your principal. Still, bear in mind that there are attendant charges for annuity death benefit features, portfolio management and contract administration, and other optional features in variable annuities. These are deducted directly from your contract values and will have an effect on your return.

Finally, taxes can be postponed on a specific type of immediate annuity. Monies from a tax-deferred annuity, when rolled into an immediate annuity, allow you to postpone paying taxes. Only the portion of your payout attributable to interest is taxable. The bulk of your annuity payout is the non-taxable return of your principal. 

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