Annuities are contracts offered by insurance firms that guarantee a future payment to the customer, often in monthly installments and frequently for the rest of their lives. Several annuities are tailored to certain needs within that general description. Annuities may be either immediate or delayed, and there are also fixed and variable varieties.
What is Immediate Annuity?
An immediate annuity is a contract between a person and an insurance company that guarantees a steady income for the owner, the annuitant, starting almost immediately. It’s not the same as a deferred annuity, which lets the owner choose when payouts start.
Another name for an immediate payment annuity is a single-premium instant annuity (SPIA). Another name for it is an income annuity.
To prepare for retirement, you should start saving money while working and making a nest egg for yourself over time. But that’s not the end of it. When planning for retirement, you should also think about how much money you will need.
Your plan should cover basic costs like housing, energy, food, and insurance for retirement income. It should also give you money to do things you enjoy, like getting a new boat or traveling. Instant Annuities are insurance that can help you make sure you have money for life.
Benefits of Immediate Annuity
Here are some of the best things about an immediate annuity plan:
a) A steady income in retirement
The plan gives you a steady income to cover your desires after retirement. This will make sure you can live on your own even after you quit.
b) A good investment
Immediate annuity plans offer a steady income that doesn’t change based on changes in the market. Putting money into these plans is a safe and low-risk idea.
c) Payouts that can be changed
No matter what works best for you, you can get your pension payments monthly, quarterly, semi-annually, or annually.
d) Make your plan flexible
Some annuity plans give you a lot of choices, like the chance to add your partner to the plan or get the money you paid back, among other things. With these choices, you can change your plan to fit your needs.
Types of Immediate Annuity
A variable annuity will spend your money in the market, while a fixed annuity will earn interest rates. A fixed annuity has many features that you can choose from, but it will only grow your income in two ways: interest rates or the market.
Fixed immediate annuity
The company that gives you the annuity agrees to give you a steady income for life or a set amount of time in exchange for your big sum payment. The fixed interest rate takes away the danger of market ups and downs. With this, you can have a steady flow of cash during retirement.
Variable immediate annuity
Variable immediate annuities are kept in separate accounts and change based on success and market risk. You can put your money into sub-accounts linked to stocks, bonds, and money market funds, among other things.
Your payment goes up if the investments do well. On the other hand, just like with standard investment accounts, if the investments don’t do well, your payments may go down.
If you’ve already reached your retirement income limits, an instant variable annuity could be a great way to add to your plan. You can focus on your goals now that you know you won’t run out of money. At this time, Thrivent does not offer variable instant annuities.
Term Immediate Annuities
In a term immediate annuity, you only get payouts for a certain amount of time, which is called a term.
Most terms are between five and twenty years, but you can pick a time that works for you. If you die during this time, the annuity will usually keep sending the payments to the person you chose as your heir.
Even if you’re still living, you will still be charged after the term is over. An instant annuity might make sense if you only need money for a certain amount of time.
According to Greg Klingler, head of wealth management at the Government Employees’ Benefit Association, fixed-time period immediate annuities are most often used to pay for a life insurance policy that needs a set amount each month.
You could also use them to end your mortgage payment or pay your bills until you get another source of income, like a pension. The idea is that you’re meeting a short-term need that won’t last forever.
Lifetime Immediate Annuities
You could also choose a lifetime immediate income instead. As you might guess from the name, these contracts have fees that last your whole life.
And finally, you could set up a joint lifelong annuity that pays out for both of your lives, like you and your spouse. As long as at least one of you lives, the payments will keep coming in with a joint lifetime annuity.
Joint lifetime annuities may have smaller payments than single lifetime annuities because the payments are based on two lives, which makes it more likely that at least one person will live a long time.
A lifetime instant annuity can help you plan for retirement because it guarantees you’ll always have at least some income as long as you live. This is true whether you’re married or not.
Index Immediate Annuities
This type of annuity is in the middle between variable and fixed ones. It is also called a fixed index annuity. Your pay is based on a market measure. In a bear market, you get more money when the index increases and less when it goes down.
With an index immediate annuity, both your gains and losses are limited. Your income is less likely to change than with a variable annuity. If you compare this to a variable immediate annuity, you’ll make less in good years and more in bad years.
Also, your losses usually have the floor, which means you won’t lose any of the money you put into the fixed index annuity in the first place.
How Immediate Annuity Payments Work?
People usually pay an insurance company a large sum to buy an instant payment annuity. Based on the terms of the contract, the insurance company agrees to give the annuitant a monthly income.
The insurance company decides how much to pay each month based on the annuitant’s age, current interest rates, and the time the payments last.
Payments usually start about a month after the item is bought. The amount of time annuitants want to be paid is also up to them. This choice is called a “mode.” Most people pay monthly, but you can also pay every three months or yearly.
Many people buy instant payment annuities to add to their other retirement income, like Social Security, for the rest of their lives. You can also buy an instant payment annuity that will give you money for a set amount of time, like 5 or 10 years.
When you buy an immediate payment annuity, the payments are usually set for the deal’s life. Some insurance companies, though, also offer instant variable annuities that change based on how well a portfolio of securities does, which is a lot like deferred variable annuities. The inflation-protected annuity, also known as the inflation-indexed annuity, offers to raise payments to keep up with rising prices.
Drawbacks of Immediate Annuity
There are some good things about immediate annuities, but they’re not suitable for everyone. These annuities aren’t usually made for people who want to get richer or see their money grow. Also, payouts may stop after you die, leaving your family with nothing.
Makes Cash Less Flexible
You can’t get your money right away when you buy an annuity. You won’t be able to get it soon, at least not without paying a hefty price.
Not A Phase Of Accumulation
Since you start getting paid immediately, there is no accumulation time, so there is less room for growth.
Leave A Smaller Inheritance
The remaining pension amount will go to the insurance company’s general account when you die unless you choose a certain amount of time to receive payments. It’s not going to your children.
More money upfront
A significant amount of cash is required to buy an immediate annuity.
Conclusion
Before you buy an immediate annuity, you should give it some thought. You will not be able to get your money back after the first payment. Taking the pros and cons into account can help you decide if buying an annuity is a good idea for your retirement plan as a whole.
