With an immediate annuity, you use a lump sum of money to purchase a contract from an insurance company in return for a guaranteed series of payouts. This stream of income is guaranteed for a specified period of time or for the rest of your (and even your spouse’s) life — no matter how long you live. The amount of the payout is based on several factors:

  • How much money you use to buy the contract
  • The interest rate environment at the time you purchase the contract
  • The payout option you select (typically at the time the contract is issued)
  • Your life expectancy — based on current age and gender
  • The date you select for your first payment (within one year of issue date)
  • Any additional features you choose

Immediate annuity income payouts may be either level or increasing periodic payments for a fixed term of years or until the end of your life, whichever is longer. Your income payouts will be taxed at ordinary income tax rates rather than the lower capital gains rates.

One thing to take into consideration with an immediate annuity is, because there is no accumulation phase, you must annuitize immediately to receive income distributions. Once you annuitize with the life-only option, the transaction is irreversible and you no longer have access to your assets in a lump sum. When you die, any remaining contract value that could have been left to your beneficiaries is forfeited to the insurance company.

Do you have questions or concerns about how immediate annuities work or how they might fit into your financial plan? Contact our expert financial planner today!