How Does An Immediate Annuity Work?
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
You will have several choices when you buy an immediate annuity. Do you want to maximize income now, or would you accept a lower payout for income that would rise with inflation? Do you want a fixed, guaranteed payout, or would you prefer a variable payout that has the potential to go up if markets rise? Your answers to these questions will help you pick the type of immediate annuity that is best for you.
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Immediate Annuity Types: Fixed, Inflation Adjusted or Variable
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.
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Immediate Annuity Payment Terms
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.
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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. Or you can try a website like QuoteMeAPrice which will collect bids on your annuity.
Next: 6 Criteria To Determine If An Immediate Annuity May Be Right For You
