Among the different types of annuities offered by your friendly life insurance agent, a fixed immediate annuity is the one that will send you a check every month for the rest of your life. Immediate annuities are more of a retirement income product and may be of little use until then. Understanding the pros and cons of an immediate annuity, however, may allow you to help someone older make a good financial decision.
A deferred annuity is a savings contract through which a lump sum of money is deposited and allowed to grow tax-deferred. This annuity is a retirement savings product. An immediate annuity provides a stream of payments from the insurance company in exchange for a lump-sum payment. A deferred annuity can be converted to an immediate annuity, but an immediate annuity also can be purchased directly.
Immediate Fixed-Annuity Payments
The annuity payment from the insurance company will be based on the size of the premium paid, the age if the annuitant -- the person getting the check -- and current interest rates. Since one variable is life expectancy, an older annuity buyer will receive a larger payment than someone younger. After the immediate annuity has been purchased, the amount of the payment is fixed and will not change for any reason.
An immediate annuity that pays until the buyer dies -- whether that is one month or 40 years after purchase -- is called a straight-life annuity. The insurance company will offer other annuity payment options with different payment amounts.
A joint-and-survivor annuity pays until a second person -- such as a spouse -- has died.
A life with refund-certain annuity pays as long as the owner lives but also guarantees that the payments will at least equal the amount paid to purchase the annuity.
A life with 10-year or 20-year certain annuity ensures the payments will last for a specified number of years or for life, whichever is longer.
If a person receiving a life plus refund or period-certain annuity passes away early, the remaining payments go to the beneficiaries.
Immediate Annuity Considerations
The main point to remember when buying an immediate annuity is that the choice is irrevocably locked in: Throw away the key. The lump sum paid cannot be retrieved. However, an annuity will come with a state-mandated 10-day or 20-day free look period during which it can be canceled and the money returned. On the other side, an immediate annuity will provide a fixed, guaranteed-for-life payment that is probably significantly greater than the income possible from any other safe investment option.
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