Immediate Annuities

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

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What Is An Immediate Annuity?

An immediate annuity is a financial product that provides a steady income stream shortly after a lump-sum payment is made to an insurance company. Unlike deferred annuities, which accumulate interest over time before payouts begin, immediate annuities start disbursing payments almost immediately. This makes them an excellent choice for retirees who need a reliable income source to cover their living expenses.

Types Of Immediate Annuities

Fixed Immediate Annuity

A fixed immediate annuity provides a guaranteed, unchanging stream of income for the life of the annuitant or for a specified period. The fixed nature of the payments provides financial stability and predictability, making it a popular choice for retirees seeking steady income.

Variable Immediate Annuity

In a variable immediate annuity, the income payments can vary based on the performance of the underlying investments. This type of annuity offers the potential for higher payments but comes with the risk of lower payments if the investments do not perform well.

Key Features Of Immediate Annuities

Single Premium Payment

An immediate annuity requires a one-time, lump-sum payment or a single premium. This single premium is then used to provide regular income payments to the annuitant.

Immediate Income

As the name suggests, income payments from an immediate annuity begin shortly after the initial premium is paid, typically within one month. This makes immediate annuities ideal for individuals who need income right away, such as retirees.

Fixed Vs. Variable Payments

Immediate annuities can provide either fixed or variable payments:

  • Fixed Immediate Annuities: Offer guaranteed payments that remain the same throughout the payout period.
  • Variable Immediate Annuities: Payments fluctuate based on the performance of the investments chosen within the annuity.

Benefits Of Immediate Annuities

Immediate annuities offer several advantages, making them appealing to retirees:

  • Guaranteed Income: One of the most significant benefits is the security of a guaranteed income stream, which can last for life or a specified period and ensure financial stability.
  • Simplicity: These annuities are straightforward to manage, with no ongoing management required once set up.
  • Tax Efficiency: A portion of each payment may be tax-free, as it is considered a return on your original investment, providing potential tax benefits​.
Immediate Annuities

Drawbacks Of Immediate Annuities

While immediate annuities offer security and simplicity, they come with some drawbacks:

  • Inflexibility: Once the lump sum is invested, accessing the principal can be difficult or impossible, limiting your financial flexibility.
  • No Inheritance: Typically, payments stop upon death, leaving no residual funds for heirs unless specific provisions are made.
  • Inflation Risk: Fixed payments may lose purchasing power over time if they are not adjusted for inflation​.
Fixed Immediate Annuity

Immediate Annuity Payout Options

When considering an immediate annuity, understanding the available payout options is crucial. Immediate annuities offer a variety of payout structures to cater to different financial needs and goals. Here are the main payout options:

Life Only

The life-only option provides payments for the duration of your life. This option typically offers the highest payout amount since it doesn’t guarantee payments to beneficiaries after your death.

Joint and Survivor

Joint and survivor annuities ensure payments continue as long as either you or your spouse is alive. This option is beneficial for couples wanting to secure lifelong income. Payments can be structured to remain the same or decrease after the first annuitant’s death.

Period Certain

The period certain option guarantees payments for a specific number of years, regardless of whether the annuitant lives through the entire period. If you pass away during the period, your beneficiaries will receive the remaining payments.

Life with Period Certain

This option combines the life-only and period certain options. Payments are made for your lifetime, but if you die within the specified period, payments continue to your beneficiaries for the remainder of that period.

Inflation-Adjusted

An inflation-adjusted immediate annuity increases payments over time to help keep pace with inflation. While initial payments are lower than with other options, this choice helps maintain purchasing power in the long run.

Cash Refund

The cash refund option ensures that the remaining amount is refunded to your beneficiaries if you die before receiving payments equal to your initial premium. This option provides a safety net, ensuring your investment is not lost.

Installment Refund

Similar to the cash refund, the installment refund option ensures that your beneficiaries receive the remaining value of your initial premium in installments if you die before recouping the total amount.

How Does An Immediate Annuity Payout

SPIA Rates And Options

Single Premium Immediate Annuities (SPIAs) provide various payout options based on age and policy type. The table below shows sample rates for a 65-year-old with $1,000,000 invested into a SPIA.

OptionMonthly Income
Life Only$6,558
Life with Cash Refund$6,155
Life with 5YR Period Certain$6,506
Life with 10YR Period Certain$6,408
Life with 15YR Period Certain$6,237
Life with 20YR Period Certain$5,998
Life with 25YR Period Certain$5,742
Life with 30YR Period Certain$5,465
5YR Period Certain$18,452
10YR Period Certain$10,537
15YR Period Certain$7,985
20YR Period Certain$6,761
25YR Period Certain$5,921
30YR Period Certain$5,467

Please be aware that Single Premium Immediate Annuity (SPIA) rates are subject to change frequently due to various factors, including changes in interest rates, market conditions, and the financial strength of the issuing insurance company. We recommend contacting us directly for the most current and accurate SPIA rates tailored to your specific financial situation and needs.

How We Can Help

At The Annuity Expert, we understand that navigating retirement planning and annuity options can be overwhelming. With 15 years of experience as an insurance agency and retirement planner, we are dedicated to helping you find the best solutions at the lowest costs.

The core problem we solve is the uncertainty and financial instability that many face during retirement. Symptoms of this problem include anxiety about outliving savings, confusion over complex financial products, and concerns about securing a reliable income stream. These issues can lead to emotional stress and financial insecurity.

We stand for providing clarity, security, and peace of mind through well-informed decisions and tailored financial products. Our expertise and extensive range of annuity products ensure that you receive the best advice and the most suitable solutions for your retirement needs.

Immediate Annuity Payouts

What We Recommend

Step 1: Initial Consultation

  • First Step: Schedule an initial consultation with one of our licensed financial professionals. During this consultation, we will assess your financial situation, retirement goals, and income needs.
  • Main Benefit: This personalized assessment ensures that we understand your unique circumstances and can provide tailored recommendations.

Step 2: Customized Annuity Plan

  • Second Step: Based on the initial consultation, we will develop a customized annuity plan that aligns with your financial goals and retirement timeline. This plan may include immediate annuities, SPIAs, or other suitable products.
  • Main Benefit: You receive a comprehensive, easy-to-understand plan designed to provide a reliable income stream and financial security.

Step 3: Implementation And Support

  • Final Step: We will guide you through the implementation process, ensuring all paperwork is completed accurately and efficiently. Our team will provide ongoing support to address any questions or concerns that arise.
  • Main Benefit: You enjoy a smooth transition into your new financial plan with the confidence that expert support is always available.

Features And Benefits:

  • Personalized Plans: Tailored to your specific needs, ensuring optimal financial security.
  • Guaranteed Income: Reliable income streams for life or a specified period.
  • Tax Efficiency: Potential tax benefits through strategic planning.
  • Expert Support: Continuous assistance from experienced professionals.

Common Objections And Rebuttals:

  • Objection: “I’m not sure if annuities are right for me.”
    • Rebuttal: Our personalized assessment ensures that we only recommend products that suit your specific needs and goals.
  • Objection: “I’m worried about the fees.”
    • Rebuttal: We provide transparent information about all costs and work to find the most cost-effective solutions for you.

Failing to work with us may result in continued financial uncertainty and missed opportunities for secure, reliable income. On the other hand, partnering with us ensures peace of mind, financial stability, and a well-structured retirement plan.

By working with The Annuity Expert, you will experience relief from financial stress, confidence in your retirement plan, and satisfaction knowing you have made informed decisions. Contact us today for free advice or a free quote and take the first step towards a secure and enjoyable retirement.

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Questions From Our Readers

What is an example of an immediate annuity?

An example of an immediate annuity is when a 60-year-old retiree pays a lump sum of $100,000 to an insurance company and starts receiving monthly payments of $500 for life, starting within a month of the purchase. This provides a steady, guaranteed income stream right away.

What are the disadvantages of an immediate annuity?

There are a few disadvantages to immediate annuities. First, they are not very flexible. Once you purchase an immediate annuity, you are locked into the payment schedule. You cannot make changes to the payments, and if you need access to the money before the end of the payout period, you will likely have to pay the penalty. Second, immediate annuities are not very liquid. If you need to cash out your annuity early, you will likely have to pay a surrender fee.

Do immediate annuities have fees?

Immediate annuities do not have fees but lower payment amounts for the annuitant if a benefit or rider is added to the contract.

How can I get out of an immediate annuity?

There are a few ways to get out of an income annuity, but it typically requires giving up some of the payments you would have received. One way to get out of an immediate annuity is to sell it in the secondary market. This can be done through a life settlement broker, who will find a buyer for your annuity and help facilitate the transfer.

Do immediate annuities earn interest?

Immediate annuities earn little to no interest because the income payments begin immediately after the annuity is purchased. If you want your money to grow, you may want to consider a deferred annuity instead. With a deferred annuity, your money is invested and grows tax-deferred until you start taking income payments, which can be at any point in the future.

Are immediate annuities taxable?

Immediate annuities are generally taxable as ordinary income per the IRS.

Is an immediate annuity a good idea?

Immediate annuities can be a great way to secure a stream of income in retirement, but they are not suitable for everyone. It is always recommended that you consult a financial professional like The Annuity Expert for personalized advice.

What is an immediate variable annuity contract?

An immediate variable annuity is an insurance contract in which the annuity payments begin immediately after the annuity is purchased. The annuity’s payout rate is based on the performance of underlying investments, which may include stocks, bonds, and mutual funds. Because the payout rate can fluctuate, immediate variable annuities have a higher risk than fixed annuities. However, they can also offer higher potential returns. Therefore, immediate variable annuities can attract investors willing to take on more risk.

What is a characteristic of an immediate annuity?

A key characteristic of an immediate annuity is its ability to provide a guaranteed, immediate, and regular income stream, typically starting within a year of the initial lump-sum investment.

What is the main difference between immediate and deferred annuities?

A deferred annuity delays income payments until a future date, allowing investments to grow tax-deferred. An immediate annuity starts income payments right after a lump sum is paid, providing instant income. The key difference is the timing of when you start receiving payments.

Is there a risk with an immediate annuity?

Yes, there are risks associated with immediate annuities. These include inflation risk, as fixed payments might lose purchasing power over time, and liquidity risk, as funds invested are not easily accessible for unexpected expenses. Additionally, there’s the risk of the insurance company’s insolvency.

Why would someone buy an immediate annuity?

Someone might buy an immediate annuity to secure a steady, guaranteed income stream, especially during retirement. This financial tool offers predictability and can help mitigate the risk of outliving one’s savings, providing peace of mind for individuals prioritizing financial stability.

What are the benefits of an immediate annuity for retirees over age 80?

Immediate annuities for retirees over age 80 offer guaranteed lifetime income, potentially higher payout rates due to shorter life expectancy, and relief from investment management decisions. They provide financial stability, reducing the risk of outliving savings.

At what age can I buy an immediate annuity?

You can buy an immediate annuity at any age, but it’s typically purchased at or near retirement age, between 60 and 70 years old.

How long do you have an annuity before you start getting monthly payments?

With an immediate annuity, payments can start within 30 days to one year of purchase, often within a month. With deferred annuities, payments start at a future date, often years later, as specified in the contract.

How long is the accumulation period for immediate annuities

Unlike deferred annuities, which have a longer accumulation phase, immediate annuities are designed to begin payouts almost immediately after a lump sum is paid. The accumulation period for immediate annuities is typically short – often ranging from 30 days to 365 days.

Could you please explain the interest rate on an immediate annuity? Is it the rate at which my money will grow or the rate at which I will get paid?

The interest rate on an immediate annuity doesn’t represent the growth rate of your money but rather factors into the amount you get paid. When you purchase an immediate annuity, you pay a lump sum to an insurance company, and in return, you receive regular payments. The interest rate is used to calculate these payments, considering your principal amount, your age, and the payment period. It helps determine how much income you’ll receive, but your principal doesn’t grow like it would in a savings or investment account.

What is the minimum time frame, in years, for purchasing an immediate annuity?

Typically, the minimum time frame for an immediate annuity is around 5 years.

Will both the 72(t) and immediate annuity avoid the 10% early withdrawal penalty on your IRA?

You’re correct that a 72(t) distribution avoids this penalty by allowing early withdrawals under specific, consistent amounts and schedules. For a SPIA, generally, it would not avoid the penalty if funded by an IRA and you’re under 59½. However, if you structure the SPIA to distribute exact amounts as defined under the 72(t) schedule and comply with all 72(t) rules, it should also avoid the penalty. It’s crucial to adhere precisely to these rules to avoid penalties.

What happens when contributions to an immediate annuity are made with before-tax dollars?

When contributions to an immediate annuity are made with before-tax dollars, the entire payout is taxed as ordinary income. This is because the contributions were not taxed initially, so taxes are applied when the annuity payments are received.

How are immediate annuities taxed?

Immediate annuities are taxed based on the type of funds used to purchase them. The entire payout is taxed as ordinary income if bought with pre-tax dollars (e.g., from a traditional 401(k) or IRA). Only the earnings portion of each payment is taxed if purchased with after-tax dollars.

Can I buy an immediate annuity at 45?

Yes, you can buy an immediate annuity at 45. Immediate annuities start paying out right after a lump sum payment, providing a guaranteed income. However, they are more commonly purchased closer to retirement age to maximize benefits.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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