Immediate Annuities

With an immediate annuity, you can receive payments right away. According to the Insurance Information Institute, payments can begin as soon as a month after the annuity is purchased. In other types of annuities, such as deferred annuities or fixed annuities, you typically pay into it over a significant period of time and, eventually, they can result in payments.

Since immediate annuities pay out right away, they can help new or soon-to-be retirees supplement their income with a guaranteed stream of payments. Immediate annuities offer financial security without the risk of running out of or losing money.

When purchasing an immediate annuity, there typically isn’t an accumulation period. Instead, you convert a lump sum of money that you already have into an immediate annuity. This means, to purchase this type of annuity, you must already have a significant amount of cash available.

But it’s important to remember that you should not convert all your liquid cash into an immediate annuity. Once you purchase the annuity and start receiving payments, it can be costly or even impossible to take out money that you put in if you have a large or unexpected expense.

Whether your immediate annuity is qualified or non-qualified depends on the status of the money that you are converting into an annuity. A qualified immediate annuity is one that you have purchased but have not yet paid taxes on. Therefore, taxes may be taken out of your annuity payments as you receive them.

Your annuity is non-qualified if you have already paid taxes on the lump sum of money. Your payments may not be taxed in this type of immediate annuity.

Like other types of annuities, an immediate annuity can pay out in several different forms depending on your personal situation and needs.

If you opt for the single life option, then you will continue to receive payments off the lump sum of your annuity throughout your life. The payments will stop when you die.

In a joint life annuity, the payments can be tied to both you and a spouse, or some other beneficiary. In this type, the payments can continue to your beneficiary even after you die. The trade-off is that your monthly payouts may be smaller since they are expected to last over a longer period.

A life- and period-certain annuity will pay out over a set period of time. So, unlike other types that would continue payments until you die, this type would only pay out over a certain number of years.

Annuities work in many ways so the best type depends on your needs. There are both benefits and downsides to an immediate annuity, so it’s important to determine if it’s right for you.