An annuity is a contractual product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, dispense a stream of payments to the individual at a later point in time. They are one of the few financial options that provide guaranteed lifelong income. Despite that appeal, many consumers fear they are too rigid and consider them irreversible, making the invested capital inaccessible once you sign on the dotted line. To counter this fear, some insurance companies have developed immediate annuities.
As reported in “The Pros and Cons of Immediate Annuities,” from FEDweek, capital from your immediate annuity may be accessed at the fifth, 10th, and 15th anniversary of the first payment. On those dates, you can access a lump-sum that will, of course, decrease the amount of future payments. This liquidity option can help calm any concerns you might have about accessing the funds in your immediate annuity.
In addition, there are other immediate annuity alternatives to consider:
- Straight life: In general, the annuitant purchases the annuity and receives monthly installments once retired. Most straight life annuities make larger payments than other annuity products because there is no death benefit. For example, a 65-year-old male can invest $250,000 in an immediate annuity and receive about $20,000 a year as long as he lives.
- Cash refund: This annuity type carries a provision that states that if the annuitant passes before receiving payments at least equal to the initial contribution, then a beneficiary receives the difference. Suppose the above mentioned man paid $250,o00 for an immediate annuity and dies after only receiving $50,000 in payments. His beneficiary would then receive the $200,000 shortfall. Annual payments would drop to about $19,000 with this option.
- Joint life: This annuity is shared between two people, almost always a married couple. Payments are made to the designated party as long as one of the spouses remains alive. The amount in the payments may decrease when the first spouse passes away. The annual payout on a $250,000 investment would fall to around $17,000 in this example.
- Single life, inflation indexed: With this option, payments begin at around $15,000 a year, for a 65-year-old male investing $250,000. The payments will then increase each year, to a certain point, to keep up with inflation.
As always, it is highly recommended to shop around for annuity products, and consult with a trusted financial advisor before signing on the dotted line.
Written by Rachel Summit
