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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. |
Here is brief description of how immediate annuities work and the different payout options to choose from. All immediate annuities will pay either a monthly income or an annual income to the owner of the contract for life. If the monthly payment option is selected payments will begin 30 days after the contract is issued and continue monthly. If the annual payment option is selected the payments will begin 1 year after the contract is issued and will continue annually.
*All options can be with single or joint life. Joint option can be selected, in which case the annuity is based on the lives of both annuitants. The monthly payments stop at the death of the last annuitant.
- Life Only: Pays a monthly income for the life of the owner. When the owner dies the income stops. (highest payout option)
- Life with Period Certain (10, 15, 20): Similar to Life only but the owner is allowed to choose a period certain option. The options available are 10, 15 and 20 year period certain. If you choose this option with a 10 year period certain you would receive guaranteed income for life with at least 10 years of guaranteed payments. The way it works is if you were to die in 5 years it could continue to pay a named beneficiary for the remainder of 10 years (the period certain). If you lived 40 years and then died the payments would stop at your death. (Payouts are slightly less than the Life only). The benefit to the owner is it protects against pre-mature death and the insurance company keeping all of the money.
- Life with Installment Refund: Pays a monthly income for as long as you are alive but guarantees to return 100% of your initial investment if you die prior to getting it all back. If you die prior to receiving 100% of your initial premium it will continue monthly payments to your beneficiary until your entire premium is received.
- Life with cash refund: Similar to Life with installment refund above. The one difference is if you die prior to receiving 100% of your original premium it is refunded in one lump sum to your beneficiary.
- Life with 3% COLA: This is similar to Life only except that your monthly payments are guaranteed to increase by 3% each year payments are begin made. Payments are considerably less than life only.
- *Joint Life with 50% reduction: This option is only available for in joint contracts. Monthly payments will be made to the owner’s until the death of the first spouse. Upon the death of the first spouse payments will continue to the remaining spouse at a 50% reduction of the initial payment. This option will have a higher payout than joint life only. This is a great option to maximize income for a couple who expects costs to go down in the future.
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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.