Immediate Annuity Income Accounts

An immediate annuity is an insurance contract that begins systematic income payments of principal and interest from inception, or at a predetermined future date. This process is referred to as an annuitization.

Immediate annuities closely resemble pension payments. These accounts generate a guaranteed, regular income stream for their owner(s). Income payments can be set up for a specified number of years (like 5, 10, 15, 20 years or more). Or they are established for the owner’s lifetime. Our independent annuity agency works with all competitive insurance companies. We help our clients find and compare the best income annuities that provide the highest payments.

Times have changed – fewer employers provide guaranteed pensions. Interest rates are high and consumers want a guaranteed fixed income during retirement.

In response, investors are allocating portions of their retirement savings to different types of annuity accounts to establish a guaranteed income stream. Using income to buy income and investing the difference can provide a stable retirement.

Immediate annuities are primarily used to provide regular income payments now and in the future. Oftentimes, they are set up for the life of the insured(s). Annuities are valued for their safe and insured interest payments and guaranteed returns. Few fixed-income products offer the stability and peace of mind afforded by fixed, indexed, and immediate annuities.

In most cases, the annuity is funded with a lump sum either from a retirement account or another liquid asset. Periodic payments are determined by a few factors, including age, number of insureds, payment schedule, and income needs. These accounts can be tailored in many ways to suit the owner(s) preferences.

There are several ways to annuitize your investment. Most accounts provide flexibility before and during the payment cycle. Some immediate annuities are set up to make payments for a lifetime, while others are established for a guaranteed number of years. Accounts can be created for single or joint owners. And payments can be taken monthly, quarterly, yearly, etc.

Your income stream does not need to begin immediately. If desired, payments can start as soon as one month from inception. However, some owners postpone their annuity income payments for years. This allows for additional tax-deferred growth and larger payouts. (Owners at or near Required Minimum Distribution age should also account for these withdrawals if qualified money is invested.)

What About Annuity Income Riders?

Investors shopping for the best income annuities should also consider income riders. These Guaranteed Lifetime Withdrawal Benefit annuity riders are optional and can be attached to some fixed and indexed annuities.

Optional GLWB riders differ from immediate annuities, but sometimes provide the highest income payments. Some have more flexibility in terms of income starting dates, and allow the owner to turn their income on and off when needed. Others provide increasing income with a known floor. Still others can provide larger payments for long term care needs.

When appropriate, we advise our clients to compare GLWB riders to immediate annuities to see which ones offer the best lifetime income and most flexibility.

It depends on the type of annuity contract purchased. Some annuities continue to make payments to a spouse or beneficiary if the owner dies. Others provide a refund of unused principal to the named beneficiaries. The only contracts that make no further payments at death are Life Only annuities.

Many immediate annuities are established with what is called a period certain clause. This means the account makes payments for a guaranteed number of years. After that period certain, the annuity stops making payments as it has met all of the payment requirements. If the owner passes away before the period certain is met, then the remaining payments (or a lump sum) would continue to the policy’s beneficiary.

A period certain or installment refund option will assure that the entire deposit is paid out either to the owner(s) or the named beneficiaries. The myth that insurance companies keep the residual funds is untrue.

A life annuity with a period certain clause is what we see most often. This option provides interest payments for the life of the owner(s). If death occurs before the period certain is reached, then the remaining account value is paid to the beneficiary. This guarantees the return of principal and interest while also establishing a lifetime income stream.

For example, if a life annuity with a 20-year period certain is purchased, 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 their lifetimes. In this example, however, no payments would be made to the beneficiaries if death occurs beyond the 20-year period certain.

The most aggressive (and least common) annuitization method is a life annuity with no period certain policy. This option typically offers the largest systematic payments, but provides no guaranteed residual payments to the beneficiaries at death. These are the only immediate annuity type that allows the insurance company to keep any leftover amounts in the account.

Several insurance companies offer inflation protection on your future income payments. If desired, you can purchase a plan offering an inflation rider – usually 2%-5%. Others grow based on changes in the Consumer Price Index.

Some annuity income riders allow for income growth based on the performance of certain market indexes. Your future payments can grow even after income payments have begun.

And once your income level increases, it stays there. It can never go down, only up. These types of income streams are tied to the S&P 500 or other market-based indexes. They might outpace inflation and help maintain owners’ increasing income needs during retirement.

Usually, the larger the guaranteed growth percentage (5% over 2%), the lower the initial payments. Conversely, if income growth is not guaranteed and tied to a market index or the CPI, then the initial payouts are larger. It’s entirely up to the owners as to which methods best fit their investment needs. We illustrate all possibilities so our clients have valuable insight as to how these annuity payments perform.

Not all annuity accounts start income right away. In fact, many defer income for months or years and allow the principal to grow and the payments to increase. These insurance contracts are called deferred income annuities and are often used to create guaranteed income during retirement.

Some provide flat income streams while others provide increasing income year over year. The increases are based on inflation changes or movements in certain market indexes like the S&P 500. These investments are popular as they allow for market diversification and stable growth. Deferred income annuity accounts serve many purposes, but are best used for guaranteed future income. GLWB riders are also popular in this space.

In other cases, guaranteed fixed annuities are used for growth and/or income. Owners might withdraw a portion of their principal and interest, but never annuitize the contract outright. These contracts are popular with savers who like safety and fixed rates of return when interest rates are high.

Immediate annuities are not a good fit for every portfolio. Some investors need more liquidity. While these accounts have changed over the years to provide more flexibility, they do tie up your funds for several years or a lifetime. If you need access to your principal, an immediate annuity is not always a good fit.

And there are interest rate risks to consider as well. Some consumers buy these products when rates are low, only to discover their income payments would have been much higher had they waited to lock in systematic income payments. Rates are unpredictable, but sometimes waiting to buy income is the smarter move.

What About The Stability Of The Insurance Company?

This is a risk with any investment. Billions of dollars have flowed into immediate annuities, and almost all have met their obligations. But it’s wise to be cautious. There are newer companies with lower ratings offering the best income payments.

Some of our clients will choose more well-known, higher-rated insurance companies because of their better reputations and longer histories. When it comes to annuity income investments, your peace of mind goes a long way.

Immediate annuities are also used to fund Structured Sale Accounts. These unique structured annuity accounts are a smart way to defer taxes and protect unrealized gains. Our clients use these policies when they are selling property or business interests that have appreciated significantly.

In other cases, immediate annuities are purchased to provide creditor protection from a lawsuit or to avoid Medicaid recapture. It’s advisable to consult your accountant and lawyer before investing. We don’t give legal or tax advice here, but we do with experts in these fields.

Immediate Annuity Income Payout Example

Posted below is a common example of the immediate annuity income comparisons we provide to our clients. In this example, we used a 70-year-old male with a $250,000 non-qualified deposit.

His single lifetime income (with cash refund) begins in one month and illustrates approximately $1,700 each month with the best-paying insurance companies. These payments would last his entire lifetime. Should he pass away prematurely and any principal remained in his account, the cash refund rider would payout any residual funds to his named beneficiaries.

Since we used a non-qualified (post-tax) deposit, only the gains would be taxable. Those monthly gains are illustrated in the last column. Each monthly payment would include approximately $600 in taxable interest gains he would report income to his accountant each year. The return of principal (approximately $1,100) would not be taxed in this example.

There are several ways to configure immediate annuities, but this illustrates the comparisons our clients see when working with our independent annuity agency.