What is an Immediate Annuity?
An immediate annuity is a tool for securing regular income. It is typically used to provide ongoing retirement income. However, whether it is a good option for your specific needs depends on your circumstances. Learn more about immediate annuities and how they work.
What Does an Immediate Annuity Offer?
An immediate annuity is a type of insurance, and insurance is a tool for managing risk, not an investment. When you purchase an immediate annuity, you are insuring a specific outcome, not making an investment. The outcome you are purchasing is lifetime income (or for the period you choose). The key to using an immediate annuity correctly is understanding what you are insuring and how to estimate the benefit provided.
Types of Immediate Annuities
You have several options when purchasing an immediate annuity. Do you want to increase your income now, or would you accept a lower payment in exchange for income that rises with inflation? If you want the highest income today, the fixed option is best. If you want income that increases with inflation, you will have to take a lower income now.
Would you like a fixed and guaranteed payment, or do you prefer a variable payment that may increase if the markets rise? With a variable payment, the monthly amount may have a guaranteed minimum with part of the payment linked to a stock market index. Alternatively, the total payment amount might depend on the underlying performance of stocks and bond funds.
The specific options for the payment vary by annuity policy, so you should review your choices carefully before making a decision.
Terms of Immediate Annuities
When purchasing an immediate annuity, you will have to select an annuity period, which determines how long your guaranteed income will last. There will be term annuities lasting for a specified number of years, while lifetime annuities provide guaranteed income for as long as you live.
There are also joint options for couples, where payments continue as long as one annuitant is alive. There are also options that offer capital return, so if you die before the total amount you put into the product is paid out, any remaining balance will go to your heirs.
The older you are, the higher the monthly income you receive. Insurance companies use actuarial tables to calculate life expectancy. The older you are, the less they expect you to live. Therefore, payments are higher if you wait longer to purchase your annuity.
Note: Women live longer than men, so payment rates for females are lower than for males.
Immediate Annuity Rates
Many retirement websites display immediate annuity payment rates. This is not the same as the rate of return or yield. You should not use the immediate annuity payment rate or the calculated yield to compare to other investments. You purchase annuities for guarantees, not for yields. The longer you live, the more yields the annuity will provide. You can compare the annuity rate from one company to what another company offers, but do not compare annuity rates to other investments. This is an inappropriate comparison.
When using an immediate annuity as part of a comprehensive retirement income plan, the monthly income from the immediate annuity means that your other capital can be invested for long-term growth. Over time, an immediate annuity can create a larger total wealth. It also creates security. These elements have a value that cannot be measured by looking solely at the rate of return.
Is an Immediate Annuity Right for You?
Here are four questions you can use to determine whether this product is right for you. Do you prefer safety and guarantees over more risky options? Are less than 50% of your expected retirement expenses covered by guaranteed income sources like Social Security and pensions? Are you in good health? Do you think there is a fair chance that you will live longer than average life expectancy? Are you concerned about overspending early in retirement, running out of money later, or protecting yourself from poor decisions due to declining mental capacities?
If
If you answered yes to any of the above questions, immediate annuities may have a place in your retirement income plan. Be sure to consider diversifying your retirement purchases across insurance companies over time.
What if you no longer want an immediate annuity?
With most immediate annuities, you cannot change your mind once you purchase the contract. For example, if you are receiving your ongoing income for two years and suddenly decide to change your mind, you won’t be able to cancel your ongoing income and reclaim the remaining amount of capital.
If you decide that you actually need a substantial amount of money, you may be able to find an outside company that buys your ongoing income from you at a discounted rate.
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Source: https://www.thebalancemoney.com/immediate-annuity-basics-what-to-know-before-you-buy-2389023
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