IMMEDIATE ANNUITY
a Lifetime Income Resource
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What is an Immediate Annuity?
An immediate annuity, usually known as Single Premium Immediate Annuity or SPIA is a type of annuity contract in which an individual makes a single payment to an insurance company in exchange for regular payments, typically starting within one year of the initial investment.
- The payments continue for a specified period of time or for the lifetime of the annuitant.
- The amount of the regular payments is based on the amount of the initial investment, the interest rate, and the annuitant’s life expectancy.
- The amount of the regular payments is based on the amount of the initial investment, the interest rate, and the annuitant’s life expectancy.
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"You can't time the market, but you can time your retirement with an immediate annuity."
An example of an immediate annuity would be a person named John who is nearing retirement age and wants to ensure a steady stream of income during his retirement years. He decides to purchase an immediate annuity from an insurance company.
He makes a lump-sum payment of $100,000 to the company and in return, the company agrees to pay him $500 per month for the rest of his life.
The payments will begin one year after the initial investment. The
amount of the payments will be based on John’s life expectancy,
the interest rate at the time of the investment, and the amount of the initial investment. John will use the monthly payments as a source of retirement income. The annuity Calculator will give you an idea on what to expect.
You can simply just call us at 1.866.526.7264, and we will run the numbers for you.
How to Fund an Immediate Annuity?
An immediate annuity can be funded with a variety of assets, including cash, stocks, bonds, mutual funds, and real estate. The most common funding source is cash, but an individual can also use other assets to purchase an immediate annuity. For example, if an individual has a large amount of stock in a publicly traded company, they could sell the stock and use the proceeds to purchase an immediate annuity. Similarly, if an individual has a property that they no longer need or want, they could sell the property and use the proceeds to purchase an immediate annuity.
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What are the Different Types of Immediate Annuities?
FIXED IMMEDIATE ANNUITY
INDEXED IMMEDIATE ANNUITY
VARIABLE IMMEDIATE ANNUITY
A fixed immediate annuity is a type of multi year guaranteed annuity contract that provides the annuitant with a guaranteed income stream for a specific period or for the rest of their life in exchange for a lump sum payment or a series of payments. The payments are based on a fixed interest rate and actuarial calculations of the annuitant’s life expectancy.
For example, imagine that a retiree has a savings of $200,000 and wants a guaranteed fixed income for a lifetime. The retiree decides to purchase a fixed immediate annuity from an insurance company with a payout rate of 5%. This means that the annuity will pay the retiree $10,000 per year ($200,000 x 0.05) for the rest of their life.
The annuity payments will continue regardless of how long the retiree lives, and the income stream will not be affected by market fluctuations. However, once the annuity payments begin, the retiree will not be able to access the original lump sum payment or change the payment schedule.
Since all multi year guarantee annuities come with a fixed interest rate for a set number of years, these fixed annuities can provide retirees with a predictable source of income to supplement other retirement savings and can help ensure that they do not outlive their savings.
An indexed immediate annuity is a type of annuity contract that provides the annuitant with a guaranteed income stream for a specific period or for the rest of their life in exchange for a single payment or a series of payments. The payments are based on a combination of a fixed interest rate and the performance of an underlying index, such as the S&P 500.
For example, imagine that a retiree has a lump sum of $200,000 and and wants a guaranteed fixed income for a lifetime but would like the potential for higher income based on the performance of the stock market. The retiree decides to purchase an indexed immediate annuity from an insurance company with a payout rate of 5%, with the payout rate indexed to the S&P 500.
The indexed immediate annuity may have a “participation rate,” which determines the percentage of the underlying index’s performance that is used to calculate the payout rate. For example, if the participation rate is 80%, and the S&P 500 increases by 10% in a given year, the payout rate for the annuity would increase by 8% (10% x 80%).
The retiree will receive the fixed income payments plus any additional payments based on the performance of the underlying index. However, if the underlying index performs poorly, the payout rate may decrease, and the retiree’s income may be lower than the fixed income payments.
A variable immediate annuity is a type of annuity contract that provides the annuitant with a guaranteed income stream for a specific period or for the rest of their life in exchange for a single payment or a series of payments. The payments are based on the performance of underlying investment accounts, such as mutual funds, and the annuitant assumes the investment risk.
For example, imagine that a retiree has a savings of $200,000 and wants the guarantee of a variable income for the rest of their life that may be higher than the income provided by a fixed immediate annuity. The retiree decides to purchase a variable immediate annuity from an insurance company that allows them to select a portfolio of underlying investment accounts, such as mutual funds, to which the annuity payments will be linked.
The annuity payments will vary depending on the performance of the underlying investment accounts. If the investment accounts perform well, the retiree will receive higher income payments, but if the investment accounts perform poorly, the retiree may receive lower income payments. Additionally, once the annuity payments begin, the retiree will not be able to access the original lump sum payment or change the payment schedule.
In this way, a variable immediate annuity can provide retirees with the potential for higher income payments that are linked to the performance of underlying investment accounts. However, it is important to carefully consider the terms of the annuity contract, including fees, investment options, payment schedule, and any riders or options, before purchasing an annuity.
Additionally, the variable nature of the payments means that there is a risk of loss of principal and that the retiree may not receive the expected income payments.
Pros of an Immediate Annuity
An immediate annuity can be funded with a variety of assets, including cash, stocks, bonds, mutual funds, and real estate. The most common funding source is cash, but an individual can also use other assets to purchase an immediate annuity.
For example, if an individual has a large amount of stock in a publicly traded company, they could sell the stock and use the proceeds to purchase an immediate annuity. Similarly, if an individual has a property that they no longer need or want, they could sell the property and use the proceeds to purchase an immediate annuity.
It is important to note that if you use assets other than cash to fund an immediate annuity, you will have to pay taxes on any capital gains. Additionally, an individual should consider their overall financial situation and consult a financial advisor before making any investment decisions.
- Protection from Longevity Risk:
With an immediate annuity, an individual’s payments will continue for their lifetime, regardless of how long they live. This can be beneficial for individuals who are worried about outliving their savings.
- Tax-Deferred Growth:
The growth of the funds used to purchase an immediate annuity is tax-deferred, which means that the individual won’t have to pay taxes on the growth until they start receiving immediate annuity payments.
Cons of an Immediate Annuity
- Lack of Liquidity:
An immediate annuity is a long-term investment and once the individual has made the single payment, they won’t be able to access the funds until they start receiving payments.
- Limited Control:
Once the individual has purchased an immediate annuity, they will have limited control over the funds. They won’t be able to make changes to the investment or access the funds early.
- No Beneficiary:
If the individual dies before receiving all the payments, any remaining payments will be lost.
- Reduced Inheritance:
The payments received from an immediate annuity may reduce the amount of assets that can be passed on to beneficiaries.
- Reduced Interest Rate:
The interest rate in an immediate annuity may be lower than other investment options, this could lead to lower payments in the long term.
It’s worth noting that the decision to purchase an immediate annuity should be based on an individual’s specific financial situation and goals. Individuals should consult a financial advisor before making any investment decisions.
What are the Fees and Costs involved?
The fees and costs associated with an immediate annuity can vary depending on the type of annuity, the insurance company that issues the annuity, and the terms of the annuity contract. Some of the most common fees and costs associated with immediate annuities include:
- Sales Charges or Commissions
Some insurance companies may charge a sales charge or commission when an individual purchases an immediate annuity. These charges can be a percentage of the single large premium, and can vary from a few percent to up to 10% depending on the company and the type of annuity.
- Surrender Charges
Some immediate annuities may include a surrender charge, which is a penalty for withdrawing funds from the annuity before a specified date. These charges can be a percentage of the lump-sum payment and can vary widely depending on the company and the type of annuity.
- Administrative Fees
Insurance companies may charge administrative fees to cover the costs of managing the annuity.
- Mortality and Expense Risk Charges
These charges are used to cover the insurance company’s cost of providing a death benefit and to pay for the costs of managing the annuity.
- Premium Tax
Some states charge a premium tax on the purchase of an immediate annuity.
- Premium Fees
Some annuities have premium fees, which are an additional charge on top of the premium paid for the annuity.
It’s important for the individual to carefully review the fees and costs associated with an immediate annuity before making a purchase. It’s also important to compare different annuities from different companies to find the one that best meets the individual’s needs and goals, and that has the lowest fees and costs.
What are Different Options in Immediate Annuities?
- Single-Life Annuity
This option provides regular payments to the annuitant for their lifetime only. Payments will cease upon the annuitant’s death, and there is no death benefit paid to beneficiaries.
- Joint and Survivor Annuity
This option provides regular payments to the annuitant for their lifetime, and payments continue to a surviving spouse or other designated beneficiary after the annuitant’s death. The amount of the payment may decrease upon the annuitant’s death.
- Period Certain Annuity
This option provides regular payments for a specified period of time, regardless of whether the annuitant is alive or not. If the annuitant dies before the end of the period, the remaining payments go to the annuitant’s beneficiary.
- Life with Period Certain Annuity
This option provides regular payments for the annuitant’s lifetime, with a minimum payment period. If the annuitant dies before the end of the minimum payment period, payments continue to the annuitant’s beneficiary until the end of the minimum payment period.
- Cash Refund Annuity
This option provides regular payments to the annuitant for their lifetime. If the annuitant dies before receiving payments equal to the initial investment, the remaining balance is paid to the annuitant’s beneficiary.
- Installment Refund Annuity
This option provides regular payments to the annuitant for their lifetime. If the annuitant dies before receiving payments equal to the initial investment, the remaining balance is paid to the annuitant’s beneficiary in installments.
- Inflation-Protected Annuity
This option provides regular payments to the annuitant that are adjusted for inflation, to help offset the impact of rising prices over time.
The choice of which immediate annuity option to select will depend on the annuitant’s goals and priorities, such as their need for income, the size of their initial investment, and their desire for a death benefit for their beneficiaries.
Fixed immediate annuity income payments are linked to the interest rate at the time of purchase.
Fixed immediate annuities work a lot like CDs. However, compared what the banks have been offering, a fixed annuity almost always offers a better interest rate.
The bottomline is that annuities are financial products designed to provide a guaranteed stream of income for a certain period or for the rest of an individual’s life, in exchange for an upfront lump-sum payment or a series of regular payments.
Annuities are often used as a tool for retirement planning or for individuals who are looking to generate a stable income stream during their retirement years.
- Guaranteed Minimum Withdrawal Benefit (GMWB): This rider guarantees a minimum withdrawal amount for a specific period of time, regardless of the performance of the underlying investments.
- Guaranteed Minimum Income Benefit (GMIB): This rider guarantees a minimum income for the life of the annuitant, regardless of the performance of the underlying investments.
- Return of Premium (ROP): This rider guarantees that the initial premium will be returned to the beneficiaries if the annuitant dies before receiving the full benefits.
- Cost of Living Adjustment (COLA): This rider increases the annuity payments based on the cost of living to help offset inflation.
- Long-Term Care Benefit (LTC): This rider provides long-term care benefits if the annuitant becomes disabled and unable to perform certain activities of daily living.
- Terminal Illness Benefit (TIB): This rider provides accelerated payments if the annuitant is diagnosed with a terminal illness.
- Spousal Benefit: This rider guarantees that payments will continue to the annuitant’s spouse after the annuitant’s death.
Please keep in mind that not all riders are available for all types of immediate annuities, and not all insurance companies offer the same riders. Before purchasing an immediate annuity, it’s important to review the available riders and compare the costs and benefits to determine which ones are best for the individual’s needs and goals.
REAL TIME LIFE INSURANCE RATES
FREQUENTLY ASKED QUESTIONS (FAQ)
The interest rate for an immediate annuity can vary depending on a variety of factors such as the issuing insurance company, the annuitant’s age, gender, health, and the payout options selected. Generally, the interest rates offered by insurance companies for immediate annuities are lower than what you might earn in the stock market but higher than what you might earn on a traditional savings account or CD. As of what is out there in the market in April 2023, the interest rates for immediate annuities ranged from around 2% to 6% depending on the factors mentioned above.
It’s important to remember that with an immediate annuity, you are trading off liquidity for guaranteed income. While a higher interest rate may be desirable, it’s important to consider the overall value and security of the annuity contract and the issuing insurance company before making a decision.
SPIAs can be a good option for individuals who are looking for a guaranteed source of income during their retirement years and who are willing to trade off liquidity for that guaranteed income. They may be particularly attractive for individuals who do not have a lot of other sources of retirement income, such as pensions or Social Security benefits.
Once a SPIA has been purchased, the terms of the contract are generally fixed and cannot be changed. However, some SPIAs may offer optional riders or features that can be added to the contract at an additional cost.
The tax treatment of SPIAs depends on various factors, such as the type of annuity, the age of the annuitant, and the distribution schedule. It’s important to consult with a tax professional or financial advisor to understand the tax implications of a SPIA in an individual’s specific circumstances.
COLA stands for Cost-of-Living Adjustment. A COLA is an increase in income or benefits that is designed to help individuals keep pace with inflation and rising costs of goods and services over time.
The use of a COLA can help individuals maintain their standard of living over time, particularly in retirement when fixed incomes may be more vulnerable to the effects of inflation.
Some insurance companies may offer SPIAs with an optional cost-of-living adjustment rider (COLA rider) that can provide increases in income payments to help offset the effects of inflation. The cost of adding a COLA rider will typically increase the cost of the SPIA upfront, but it can provide greater peace of mind for individuals who are concerned about maintaining their standard of living over time.
