Consumers who need a guaranteed, stable and systematic income can establish an immediate annuity account. Also know as an annuitization or an income annuity, these accounts provide regular monthly payments for a specified period of time to the account holder. The payments will consist of principal and interest and continue for the term selected.
Several factors will determine the monthly payout including the annuitant’s age and gender, amount invested, current interest rates, payout duration, and whether the owner(s) wants the payment to be adjusted for inflation.
One of the first options to determine is the duration of the income stream. A client might only need income for ten years as part of a structured settlement or litigation award. In this case, an initial deposit can be calculated in order to determine a guaranteed monthly payment for ten years.
In other instances, clients will need guaranteed income for their lifetime. This is known as a life annuity and it is guaranteed to make payments for the life of the annuitant(s). Life annuities are often structured with a period certain to guarantee return of premium to the owner(s).
If you invest in a life annuity with a 20 year period certain, then the income payment would be guaranteed for at least 20 years. Should the owner pass away prematurely, then the payments would continue to the named beneficiary. Insurance carriers will usually allow for a period certain of up to 50 years. However, the longer the selected period certain, the smaller the monthly payments will be.
A life annuity with no period certain will provide the largest monthly payment to the owner. This type of account is best for someone who needs maximum monthly income, but who is not concerned with providing benefits to a beneficiary.
Younger annuity owners may desire a payment that can be adjusted for inflation on a yearly basis. Most common are accounts that will increase monthly payments by a compounded rate of 3% or 5% year over year. Monthly payments in the first few years will be smaller than an income annuity without an inflation rider, but will increase substantially over time.
Income payments compounded at a desired percent take into account the time value of money. A $1,000 monthly payment today will not buy $1,000 worth of goods and services 20 years from now. Inflation protection allows consumers peace of mind as they grow older, especially if they have invested in a life annuity.
In summary, purchasing an annuity designed to take care of future need will take careful consideration. Shopping for the best rates is just as important as selecting the annuity term and inflation rider.
With the help of an experienced agent, annuity income planning can be designed to provide for a lifetime’s worth of needs. It is best to work with an agent who can provide quotes from several well rated carriers as payouts can differ significantly depending on the annuity parameters.