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Immediate Annuities

What Is An Immediate Annuity - An Immediate Annuity can be summarized as an investment with an insurance company that does not guarantee a specific rate of return but rather a lifetime of income that begins as early as one month after purchase and will last until death.  Immediate Annuities are used mostly for retirement purposes as a way to provide another source of guaranteed lifetime income.  When purchasing an Immediate Annuity there are several common payout options to choose from. 
 
 

Straight Life Payout - Pays the purchaser a monthly sum of income until the purchaser’s death (highest monthly payout)

Joint Life Payout - Pays the purchaser and spouse a sum of income until the last spouse is deceased.

Life or (Joint Life) with Period Certain (5, 10, or 20) - Pays for as long as the purchaser (or purchaser's spouse if joint life is chosen) is alive with a minimum of 5, 10, or 20 years (depending upon period certain option) should the purchaser die prior to the period certain option.  Period certain options are most common in the immediate annuity world, because they provide some level of protection for beneficiaries.

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Immediate Annuity Examples

Single Life Straight Life Annuity

Let’s take a look at the simplest type of immediate annuity, a single premium immediate annuity with the single life payout option.   In this example, Joe is just entering retirement, has no beneficiaries and is interested in getting the highest guaranteed payout possible.  In this example here is the information that we need:

Client Name:  Joe Client
Client Age:  67
Client State of Residence:  CA
Payout option:  Straight life
Initial Premium:  $100,000 
Monthly Income:  $604.65
 
So here is how it works:  Joe invests $100,000 with a highly rated insurance company on January 1st 2010.  On February 1st 2010 Joes begins to receive income from the insurance company of $604.65 (or $7,255.80).  Joe will continue to receive this monthly income for as long as he lives.  If Joe dies when he is 80 his income will stop after only receiving $94,325.40 in payments and the insurance company keeps the rest.  On the other hand if Joes lives to be 100 years old he will have received $239,441.40 of payments (much more than your original investments).  
 
Who Should Consider Immediate Annuities - A person who might consider an immediate annuity is someone getting ready to retire and looking to replace some of their income with guaranteed lifetime income from an insurance company. It is very common for retirees to convert 25% of their retirement assets into an immediate annuity.
 
Another Example: Jim, a 65 year old male is getting ready to retire. He has social security and $500,000 from his company's 401(k) retirement plan. Jim is looking for a way to provide himself with another stream of steady reliable income that he will never have to worry about outliving. Jim is also concerned with investing his money in stocks and mutual funds because of the potential for loss. Jim looks into purchasing an immediate annuity with a highly rated insurance company for $200,000. Jim finds the right immediate annuity to meet his needs and invests $200,000 into a Life with 20 year period certain immediate annuity. The immediate annuity guarantees Jim $14,500 per year or $1,208 per month in guaranteed lifetime income. Since Jim chose to purchase an annuity with a 20 year period certain, if he should die before his 85th birthday (20 years after purchase) his beneficiary would continue to receive his monthly payments ($1,208) until what would be his 85th birthday. In this example Jim has done two things: First he made sure his income was secure and guaranteed and second he found a way to look out for his beneficiaries should he die earlier than planned.