Immediate Annuity Income
Get a Quote »An immediate annuity is an investment account that begins systematic income payments of principal and interest from its inception or a predetermined future date (one year or less.) This process is referred to as an annuitization.
Immediate annuities works very much like guaranteed pension payments as they generate a reliable stream of income for the owner. The monthly payments can be established for a specified period of years or for the lifetime of the account owner.
Immediate Annuity – Income Planning Accounts
Times have changed. Very few employers provide guaranteed pensions and the stock market has been extremely volatile over the last decade. In response, consumers have been allocating a portion of their retirement monies to annuity accounts as a means to setup self funded, reliable income payments.
These accounts are primarily purchased to provide regular income payments now and in the future – and sometimes for life. Annuities are valued for the safety and reliable fixed interest returns they provide. Very few investments offer the stability and peace of mind afforded by fixed, indexed, and immediate annuities.
How Do Immediate Annuities Work?
In most cases, the investment will be funded with a lump sum either from a retirement account or other liquid assets contributed by the owner. The systematic payments will then be determined based on the age, gender, state of residence, interest returns, and in some cases health of the owner. Payments are usually taken monthly, but can be requested on a quarterly, semi-annual, or annual basis.
There are several ways to annuitize the deposit, thus the terms of the annuity will also determine the systematic payment amounts. Some annuities are setup to make payments for a lifetime while others are only established for a guaranteed period of years. Still others are based on more that one life if a spouse is also added to the account. In this way, you can determine the payout methods that best suit your income needs.
In most cases, the payments begin after one month of deferral, but some others are postponed up to a year or longer. Those who are saving toward an income stream might first purchase a deferred annuity and then annuitize it when they are retired and in need of extra income.
Guaranteed annuity income riders (those attached to a deferred fixed or indexed annuity) make sense if you are planning for the future and who do not need a payment stream right away. This allows you to accumulate principal on a tax-deferred basis before establishing an income stream.
What Happens To An Annuity When The Owner Dies?
It depends on the type of annuity contract purchased. Most immediate annuities are setup with what is called a period certain. This means the owner has purchased an account that will make payments for a certain period of years.
After the end of the agreed upon number of years, the annuity will have paid out all principal plus interest and the payments will terminate. If the owner passes away before the period certain has been reached, then the remaining payments will continue on to a named beneficiary in the contract – usually a family member.
In other cases, a spouse will be the joint owner and/or annuitant and the account will keep making payments until the second passing. Future payments will depend on the term (lifetime, period certain, or both) and the owner(s).
Lifetime Income With A Guaranteed Period Certain
A life annuity with a period certain is another option. This choice provides interest payments for the your lifetime. If death occurs before the period certain has been reached, then the remaining account value will be paid to your named beneficiary. This guarantees the return of your principal plus the accumulated interest to your family or other named beneficiaries.
For example, if a life annuity with a 20 year period certain is purchased with a lump sum deposit, then the annuity will make payments to the owner or named beneficiaries for a minimum of 20 years. After 20 years, the annuity will continue to make payments to the owner(s) for his or her lifetime. However, in this example, no payments would be made to the beneficiary of the owner(s) once death has occurred and the 20 year period certain had been reached.
Lifetime Immediate Annuity With No Period Certain
The most aggressive annuitization method is the life annuity with no period certain. This option will offer the largest systematic payments to the owner, but no guarantees to any beneficiaries at passing. This type of account guarantees payments to the owner(s) only, but no one else. Should the owner reach his or her life expectancy or beyond, he or she will have received much more than was originally contributed to the policy.
Consumers concerned more with meeting income needs and less about a family inheritance might select a life annuity to provide the highest possible monthly payment. A life annuity with no period certain is the only type of account that allows the insurance company to keep any remaining funds at passing.
Inflation Protection On Future Investment Income
Several insurance companies offer inflation protection on the future stream of income. If desired, you can purchase a plan offering a compounding inflation rider – usually 3% or 5%.
This means the future payments will grow by the desired compounding rate each year and every year.
However, payments in the first few years will be lower than a traditional plan without an inflation rider. The larger the inflation protection, the lower the initial payments, so there is a trade-off.
Still other annuities will increase payments each year based not on a fixed return, but rather an indexed market return. In this case, payments are tied to an index like the S&P 500 and can increase year to year based on the performance of the chosen index. However, unlike a variable annuity, future payments cannot decrease below the contractual guarantee if the index loses value.
Creditor Protection And Structured Payments
In other cases, immediate annuities are purchased to provide creditor protection from a lawsuit or to avoid Medicaid recapture. An immediate annuity can also be funded as part of a structured settlement in order to setup reliable income for an injured party.
Additionally, immediate annuity accounts are often used in conjunction with a structured sale to spread out realized capital gains taxes in large property or investment sales. However, their most common use is simply to provide income during retirement.
A Sound Investment Income Strategy For Retirement
The amount of the systematic payment will depend on age, gender, term, current interest rates, and the sum of the initial investment.
It is also worth noting that many deferred fixed and equity-indexed annuities can be exchanged for immediate annuities after one or more years.
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