If you have accumulated a large lump sum and want to turn it into a steady stream of guaranteed monthly or annual payments, you might want to consider an immediate annuity. When you buy an immediate annuity from a life insurance company or mutual fund family, you invest that lump sum and the company gives you a guaranteed monthly or annual payout. Depending on the type of annuity you choose, the payments can continue for a set period of time, or for the rest of your life.
Review your financial situation and make sure an immediate annuity is the right choice for you. An immediate annuity can be a good choice for people who worry that they will not be able to manage the nest eggs they have accumulated, or that they will run out of money later in retirement. One drawback, however, is that you lose access to the money. If you need to put a new roof on the house or make a major purchase, you will have to borrow the money or use other assets to pay for the work.
Determine how much you want to put into the immediate annuity. You might want to divide your total nest egg and use half the money to buy an immediate annuity while keeping the other half available for other uses.
Contact several life insurance companies and mutual fund famiies to ask about their immediate annuity options. Many providers have immediate annuity calculators on their websites to make it easier to estimate your payout. You simply enter the amount of your lump sum, along with your age, gender and the state you live in. The immediate annuity calculator then gives you the amount of your monthly payout under a number of different scenarios. You can, for instance, buy an annuity that pays you for life, then provides survivor benefits to your spouse. You can also choose an immediate annuity whose payments are indexed to inflation, similar to Social Security. You will get a lower initial payment if you buy an inflation-indexed annuity, but you will also preserve your buying power.
Call the insurance commmissioner's office in your state and ask about state guarantees for immediate annuities. These guarantees are in place to protect your payments if the life insurance company goes out of business. While buying from a reputable company can protect you, it can be hard to predict what will happen 20 or 30 years down the road. Having a state guarantee in place gives you peace of mind that your money will be there when you need it most.
Contact the life insurance company you want to use for your immediate annuity and request the paperwork to complete the transaction. Follow the instructions on the form concerning how to complete the application, and how to get the lump sum payment to the company.
- Make copies of all your paperwork and keep it with your financial records. Keep copies of all your annuity statements and payout notices as well.
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