What is an Immediate Annuity?
An immediate annuity is thought to be one of the oldest forms of annuity contracts in human history, dating back thousands of years. Immediate annuities are also known as income annuities or as single premium immediate annuities (SPIA). This form of annuity is designed to provide guaranteed income payments that will begin between one month and one year of its initial purchase. Immediate annuities are also considered to be irrevocable upon issuance of the contract agreement—the arrangement cannot be undone.
How Do Immediate Annuities Work?
When purchasing an immediate annuity, the buyer makes a lump sum payment and enters into a contractual agreement with an insurance company that will make guaranteed income payments over the course of the annuity’s specified term length. This essentially acts as a personal, short-term pension or retirement plan. This very flexible annuity plan can be customized in various ways, ensuring that you are left with a payment term agreement that meets your specific needs. Learn more about the different payment term options below:
Single Life Annuities
- Single Life Only: These annuities will make payments over the course of the annuitant’s lifetime and will cease upon the death of the annuitant.
- Single Life with Period Certain: Payments are made over the course of the annuitant’s lifetime, but should they die before the end of the period certain term, the payments will continue to be made to your designated beneficiary until the specified period certain term has ended.
- Single Life with Cash Refund: Payments are made over the course of the annuitant’s lifetime, but if they die before receiving an amount equal to the amount of their original premium, the difference will be delivered in one lump sum deposit to the designated beneficiary.
Joint Life Annuities
- Joint Life Only: Payments will be made for as long as either the annuitant or joint annuitant is alive.
- Joint Life with Period Certain: Payments are made for as long as either the annuitant or joint annuitant is still alive. If both annuitants die before the end of the specified term, the payments would continue to be made to the designated beneficiary until the end of the term.
- Joint Life with Installment Refund: Payments are made so long as one of the two annuitants remains alive. Should both die before receiving an amount equal to their initial premium, payments would then continue to be delivered to the designated beneficiary.
- Joint Life with Cash Refund: If both annuitants should die before the end of the term, the difference remaining between their initial premium and the payments they had since received would be delivered in a lump sum payment to the designated beneficiary.
Period Certain Only Annuities
These immediate annuities payout over the course of the term—typically between 5 and 20 years. If the annuitant should die before the end of the term agreement, payments would be delivered to the beneficiary. These payments cease at the end of the period certain term regardless of whether or not the annuitant is still living. As such, it is possible that one might outlive this particular annuity payout option.
Qualified Funds VS Non-Qualified Funds
You can always purchase an annuity with either qualified or non-qualified funds. Qualified funds are funds that are located with a tax-qualified account, such as an IRA. Non-qualified funds are funds that come from any place other than a tax-qualified account.
Payments stemming from immediate annuities purchased with qualified funds will be fully taxable as income. This is because these qualified funds have not yet been taxed. But when an immediate annuity is purchased with non-qualified funds, a portion of each monthly payment is considered as a return of your previously-taxed principal. Those portions of your monthly payments are therefore excluded from taxation. The specific amount excluded from taxation is known as the exclusion ratio and is determined by the annuity-issuing insurance company.
If you’re looking for a flexible, short-term, guaranteed stream of retirement income and are ready to invest a portion of your presently-available assets, then an immediate annuity may be the best option for you. If you think an immediate annuity would help you, contact The Direct Effect today to run through your available options—we’re happy to help you find the best short-term investment strategy for you.