When you purchase an immediate annuity you enter into a contract with an insurance company to purchase a guaranteed stream of income. The insurance company calculates the amount of monthly income they can provide to you based on the type of annuity (fixed, variable or inflation-indexed), the term of the annuity that you choose (life-only, joint life, term certain), and your age and gender (so they can estimate your life expectancy).
Immediate Annuity Types
- Fixed Immediate Annuity
With a fixed immediate annuity, the amount of income you receive each month will be a fixed amount; it will stay the same throughout the term of your annuity contract. To determine the approximate amount of income you would receive from an immediate annuity, depending on how much you invest, visit Immediate Annuities. The site will ask you for your age, spouse’s age, state, and the amount to invest, and will then provide you with an estimate of monthly income depending on the term you choose. - Inflation-Indexed Immediate Annuity
An inflation-indexed immediate annuity is a form of a fixed annuity. You receive a guaranteed stream of income from the insurance company, and that income will rise each year based a predetermined formula; usually the increase is tied to changes in the CPI (Consumer Price Index). An inflation-indexed annuity will provide a lower initial amount of monthly income than a non—indexed immediate annuity, but over time, as inflation continues, the monthly income will gradually increase, surpassing the amount you would be receiving from an equivalent non-indexed annuity. - Variable Immediate Annuity
With a variable immediate annuity, the insurance company does not provide a guaranteed stream of income; instead the amount of income you receive will depend on the performance of a portfolio of underlying investments, usually stock and bond mutual funds. Thus your payment will vary each month, or reset once a year, depending on the way the annuity is structured.
Immediate Annuity Terms
When you buy an immediate annuity you will have to choose the term of the annuity, which will determine how long your guaranteed income stream will last. A term certain annuity will have an income stream that lasts for a specific number of years, whereas a life annuity provides guaranteed income for as long as you are alive.
Alternatives To An Immediate Annuity
Before purchasing an immediate annuity, explore alternatives like retirement income funds, laddered bonds, or a total return portfolio. You may also wish to learn how to calculate the rate of return of an immediate annuity, so you can compare it to other alternative investments.
What If I No Longer Want The Immediate Annuity?
With most immediate annuities, you cannot change your mind once the contract is purchased. For example, if you have been receiving your stream of income for two years, and you suddenly change your mind, you cannot cancel the income stream and get your remaining lump sum of money back. If you decided you absolutely had to have a lump sum of money, you may be able to find an outside company, such as J.D. Wentworth to purchase your income stream from you at a discounted price.
