Immediate Annuity - Definition and Explanation

Income Ahead
Immediate annuities allow you to set up a "paycheck" from your savings. James Brey/E+/Getty Images

An immediate annuity is an annuity that starts making income payments “immediately” after it is set up (typically the first payment comes a month or so after submitting an application).

Annuities are insurance contracts that can be used for saving money, and then taking income off of those savings.  

How Immediate Annuities Work

When you use a single premium immediate annuity (SPIA), you deposit a lump-sum of cash (your “premium payment”) with an insurance company.

Then, that company makes regular income payments to you (you get monthly or annual payments, for example).  Those payments might come as paper checks or electronic deposits directly to your bank account.

Once you buy an immediate annuity and start taking income (also known as “annuitizing”), there’s generally no turning back: you’ve made an irrevocable decision and it’s difficult, expensive, or complicated to get out of it (but there are always options). In return, the insurance company promises to continue making payments to you.

Immediate annuities are different from deferred annuities, which simply hold on to your money (instead of paying out income).

How Much do Annuities Pay?

The amount of income you get depends on several factors. Obviously the more you contribute, the more you’ll get back. But you also have options on how the income is paid. For example, you might choose one of the following:

  • You get guaranteed payments for the rest of your life – no matter how long you live
  • You get payments for 10 or 20 years, or your beneficiaries get the money if you don’t live that long
  • Payments last as long as you or your spouse are still alive
  • Other options, depending on your insurer

The largest payments often come with the first choice – a single lifetime income.

If you want the payments to last as long as two people remain alive, the insurance company is taking more risk and will reduce your payments accordingly.

What Happens at Death?

If you annuitize and choose lifetime payments, the payments usually simply stop at death (or the second death, if you chose joint lifetime payments). Whether or not you come out ahead depends, among other things, on how long you live. The insurance company is very familiar with statistics, so if you live an unexpectedly long life, you may end up getting a good deal. But if you die within two months of taking income and did not choose a “period certain” (such as 10 years), the insurance company can simply keep the principal that you put into the annuity.

Unless you can predict how long you’ll live, there’s always some risk of using an immediate annuity. Therefore it’s essential to carefully evaluate the risks and compare alternatives (perhaps you can just spend down your assets without using an insurance company).

Complications

In addition to the risk of living a short life, immediate annuities can sometimes get complicated.

There are different types available from numerous different providers. Some promise inflation protection and offer additional bells and whistles, but there’s always a price to pay for extra features.

Another risk is the possibility of your insurance company going belly-up. Insurers are not government guaranteed like FDIC insured banks, so you’ll want to choose strong insurers (and hope they continue to stay strong throughout your lifetime).

Buying an immediate annuity is a big decision. It can provide regular income like the paychecks you’ve grown accustomed to, but annuities are not for everybody. Speak with a local financial planner and discuss all of the alternatives before you pull the trigger.

Important Disclosure

This page contains general educational information about annuities, but it does not take your personal situation into account, nor is it necessarily relevant to any particular policy you are looking at. Discuss your options with a financial planner, speak with your local licensed insurance agent, and read all insurance company documents carefully. The lingo might be different, and things might have changed — and you don’t want to make any assumptions about something as important as lifetime income.

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