Immediate annuities are secure financial tools offering instant access to annuity payments after purchase.
What Is an Immediate Annuity?
An immediate annuity is a contract used to ensure financial stability over a period of time. Annuitants — or annuity owners — use a lump-sum payment, also known as a single premium, to purchase an immediate annuity, which immediately begins paying out to the annuitant. These annuity withdrawals occur at regular intervals for a specific period of time, or until the annuitant’s death. Immediate annuities may be wise choices for retirees looking to receive income from their annuity right away, in place of a paycheck.
How Do Immediate Annuities Work?
Immediate annuities are meant to provide a reliable stream of income so annuitants do not outlive their nest egg. These contracts are typically bought through an insurance company with a lump sum deposit called a single premium. Unlike a deferred annuity when annuity payments are disbursed at a later date, immediate annuity payments are disbursed immediately upon receipt of the lump sum payment. In exchange, the insurance company agrees to provide you with regular payments for a set period of time, or life.
Annuitants can choose several variables of their annuity before they purchase it. Once the contract is signed, however, an annuity cannot be changed. While writing the contract, annuitants can choose how frequently they’d like to receive payments, and how long they’d like to receive payments for. Many people choose the length of their contract based on their estimated life expectancy. It is also common for annuitants to choose a monthly disbursement option, although some also choose quarterly or annual payment plans.
An annuity contract can also be written to accommodate more than one person, such as a married couple. A joint and survivor annuity, for example, pays out to both annuitants until one dies. Whichever spouse lives the longest will continue to receive their annuity payments until their death.
The amount you receive greatly depends on the interest rates and the type of immediate annuity you choose. An immediate fixed annuity are invested in bonds and are considered a low-risk option. These annuities pay out a guaranteed amount. Immediate variable annuities are invested in the stock market or other fluctuating financial tools, and as a result can be considered a riskier choice. While an annuitant may receive a higher amount than they initially invested, they may also lose money from their annuity.
Immediate Fixed Annuity vs. Immediate Variable Annuity
There are two main types of immediate annuities: fixed and variable. While both options are intended to provide a solid financial cushion, the interest values differ and affect the amount of payment disbursed
Immediate Fixed Annuity
Immediate fixed annuities are tax-deferred contracts that guarantee a consistent rate of return. The money invested in this annuity will grow and not drop in value, no matter the financial climate or the amount of accrued interest. Immediate fixed annuity contracts guarantee the amount disbursed is consistent every pay period.
Immediate Variable Annuity
Immediate variable annuities are financial contracts linked to the stock market or other financial tools, such as the value of precious metals. Annuity owners choose where to invest their money when purchasing the annuity and the insurance company invests it on their behalf. This risk to potentially provide a larger rate of return, or a lower one. Unlike a fixed annuity, the payout amount can fluctuate depending on the performance of the investment. If the market does well, the annuitant could benefit from a significantly higher payout. On the other, if the investment performs poorly, annuitants risk losing a portion of their investment and any accrued interest.
Who Should Consider an Immediate Annuity?
Immediate annuities can offer individuals a sense of security that life insurance policies cannot. Life insurance policies require owners to pay monthly premiums until their death, at which point their heirs or beneficiaries receive the payout. An immediate annuity, conversely, requires a one-time lump sum payment in exchange for payments throughout their contract term or until their death.
Though this financial investment can provide an additional income stream, certain individuals can benefit more from this product:
- Senior Citizens or Retirees – Immediate annuities are great options for retirees seeking additional income. Social Security payments are often not enough income to accommodate everyday needs and maintain a higher quality of life. Combining annuity payments with Social Security and other government benefits can help people 65 and older to maintain a sufficient budget in retirement.
- People with a Longer Life Expectancy – When an annuitant dies, the remainder of funds in their annuity goes to the insurance company they purchased it from. Only those who purchase an additional death benefit rider may leave their remaining funds to a beneficiary upon their death. Therefore, if you die shortly after purchasing the annuity, you risk losing a significant amount of money. To realize the maximum benefit from their money, it’s best for young people with a long life expectancy to purchase immediate annuities.
- Individuals with Dependents –If you are looking to secure your family’s financial future, an immediate annuity may be a great option. If you purchase a death benefit, you can choose to select beneficiaries that will receive the remaining disbursements after their death.
Pros and Cons of Immediate Annuities
Immediate annuities can help to secure a guaranteed revenue stream for your entire life. They can be customized to suit your financial needs prior to receiving payments, and disbursement begins immediately. However, before deciding on an immediate annuity, consider the pros and cons of your potential investment.
A majority of immediate annuity benefits are related to income. In addition to providing a consistent income stream over a period of time, other advantages of this investment include:
- One-time purchase procedure
- Flexible payment options
- Tax-deferred investments
- Can include a death benefit
- Accrued interest
However, immediate annuities can have some drawbacks if purchased without proper planning. Some of the cons include:
- Inflexible contract terms
- Surrender of principle
- Withdrawal fees, also known as surrender charges
Selling Your Immediate Annuity
To many, the biggest drawback of an immediate annuity is the inflexible contract terms. While an annuity may have been a wise choice at the time of purchase, financial circumstances can easily change. You may later need the money in your annuity to pay for a home repair, medical emergency, outstanding debt, or a college education.
If this happens to you, CBC Settlement Funding can help. Our team has experience working in the secondary market, and received an A+ rating from the Better Business Bureau. In exchange for selling the rights to your future annuity payments, CBC Settlement Funding can give you access to cash quickly.
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