What Is an Immediate Annuity?

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An immediate annuity is an investment that begins paying out distributions the same year you deposited funds. Withdrawals can begin as soon as one month after you make your initial payment.

Immediate annuities are sometimes called income annuities, since they deliver a steady source of income, or single premium immediate annuities, since you make one payment and then begin taking disbursements within that year.

For people seeking a steady source of income in retirement, an immediate annuity can deliver a guaranteed income stream for an entire lifetime or a specific time period, which can be as short as five years.

You can typically buy immediate annuities from a life insurance company, but they are not a life insurance product. They are a popular product for retirees because they provide a steady income and may have tax advantages. They are generally considered a low-risk investment, although you may receive a greater return from other investment types.

How Immediate Annuities Work

An immediate annuity begins with one lump-sum payment to the insurance company. You can begin withdrawing funds as soon as one month after that initial premium payment. You may be able to wait as long as one year before you start taking disbursements, which can be taken as a lump sum or monthly payments, depending on the terms of the annuity.

When you’re choosing an immediate annuity, pay attention to the lump sum investment required, the payout schedule, how soon you can begin withdrawing funds and the interest rate or return on your investment.

Although annuities are not life insurance, top-rated life insurance carriers often underwrite them. The insurance company manages the annuity to guarantee the return.

When Does An Immediate Annuity Begin Making Payments?

Most people opt to take their annuity payments on a monthly basis to provide a steady stream of income, but some annuities allow you to take disbursements quarterly or annually. You’ll want to consider your budgeting needs and tax ramifications for withdrawals.

Some immediate annuities also give you the option to pull out a lump sum of money in case of an emergency or a better financial opportunity. This adds liquidity to your investment that may not be available with other types of investments, such as a 401(k).

Types of Immediate Annuities

Immediate annuities come in a variety of forms for individuals or couples. The best annuity for you will depend on your marital status, age and financial goals, among other things.

Single-Life Immediate Annuities

A single-life annuity puts money in your pocket from the starting date throughout your life. Keep in mind, if you don’t live long enough to receive the full amount you invested, you could lose money. However, you could come out ahead with a higher return if you live longer than the insurance company expects.

If you don’t have a spouse or other surviving dependents, this could be the best choice.

Joint-Life Immediate Annuities

A joint-life immediate annuity is similar to a single-life annuity, except there are two beneficiaries; the annuity pays through the lifetime of the last surviving spouse.

If you have other heirs, such as children or grandchildren, you can add a death benefits rider to an annuity, which means that the remainder of the funds in the annuity can be passed onto an heir.

Period Certain Immediate Annuities

A period-certain annuity, or fixed-period annuity, pays benefits for a pre-determined amount of time, typically between five and 30 years. If there is money left over in the account, you can roll them into another annuity, withdraw them in a lump sum, or roll them into another retirement account type. You may also be able to extend the annuity contract.  

Specified Amount Annuity

A specified amount annuity pays a set dollar amount. Once that amount has been paid, payments stop.

Immediate Annuity Example

Annuity payments depend upon:

• Your age
• Your general health
• Your gender
• Where you live
• Type of annuity
• The rating of the insurance company offering the annuity

Monthly payments for a 55-year-old with a single-life income annuity will be lower than those for a 70-year-old with the same product. That’s because the 55-year-old will, presumably, receive more payments over their lifetime.

Here’s a look at payouts for someone with a lump sum investment of $100,000 living in Florida at various ages.

Keep in mind, a fixed-term annuity will pay the same amount, regardless of age or gender. A $100,000 annuity with a term of 5 years will pay $1,844 per month. A 10-year fixed-period annuity will pay $1,032 per month, based on the calculator at ImmediateAnnuities.com.

Payouts change, however, with a lifetime annuity.

You can see how it might make sense to roll over another investment into an immediate annuity for consistent income, especially in your later years. If you are getting close to retirement, or have already retired, and fear you may not have enough money to last through your later years, an immediate annuity could be a solution. If you are in good health, you might consider a single-life income annuity, which will pay you a fixed return for your entire life.  

How To Purchase an Immediate Annuity

Insurance companies offer annuities at different rates, with varying fees. As with any other major purchase, you want to shop around and get multiple quotes. You can do this easily online, so you will have the quotes in writing. Most quotes are good for a week or two, so take your time but don’t wait too long to make your decision.

Choosing the Right Provider

Besides choosing an annuity based on the rates, you’ll want to know your money is secure. Look at the AM Best, Fitch, Moody’s, or Standard & Poor’s ratings to find a company with solid financials. You may also read online reviews to gauge the level of customer service you can expect.

Comparing Annuity Products

When you get ready to purchase an annuity, understand the terms–how long will you be receiving payments? Ask about any fees associated with the product. Find out if you receive payments monthly or quarterly and if you have the flexibility to withdraw funds in a lump sum in an emergency.  

Some annuities may have hidden fees that include:

• Underwriting
• Account management
• Early withdrawal penalties
• Surrender charges
• Administrative fees
• Commission

Most annuities offer a cancellation period of at least 10 days, where you can close the account with no penalties. This is called the “free look” period.

Alternatives to Immediate Annuities

Many investors shy away from immediate annuities because they can be complicated to understand. Hidden fees can diminish your earnings. Plus, the returns are not as good as many other investments, such as a 401(k). To open an immediate annuity, you’ll need a lump sum of cash.

Deferred Annuity

If you prefer to let your investment build over time, a deferred annuity might be a better option. With a deferred annuity, the investor makes monthly premium payments, either on a tax-deferred basis or with after-tax dollars. Then, they can begin making withdrawals after a certain amount of time.

Bonds

Bonds are another form of stable, predictable income. You can create a bond ladder, where bonds mature at different times, to create a stream of income.

High-Yield Savings Account

In today’s market, a high-yield savings account can provide a return as high as 5%. While you won’t see any tax advantages to a savings account, it provides easy access to your money when you need it.

Dividend Stocks

For less risk-averse investors, dividend-paying stocks can also provide steady income.

Key Takeaways

An immediate annuity can supplement other retirement income, such as your Social Security income and money from a 401(k) or other investments. If you are nearing retirement age or already retired, have a lump sum of money to invest, and want a guaranteed monthly income, an immediate annuity can provide these benefits.

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