Immediate Annuities

An Immediate Annuity does just what it says. The annuity distributions begin shortly after the annuity contract is signed, usually within 1 year, and the investor has funded the annuity or paid the agreed upon lump sum payment. Immediate Annuities can be structured with a couple different payout options such as, Lifetime Annuity payments where the annuity holder receives level, regular, lifelong payments… also referred to as a lifetime distribution. Investors can also choose a Fixed Period, sometimes referred to as Period Certain for the annuity distributions.

The normal candidate for an immediate annuity is a retiree that wishes to invest personal savings or the proceeds of qualified retirement plans, into a safe and secure income producing investment. The annuity payment amount is based off the life expectancy and interest rate for the period of the annuity contract. For the most part, the Immediate Annuity Lifetime or Fixed Period distributions are based on a fixed interest rate that is determined at the time that the annuity is funded. In some cases the annuity may have a provision that allows for an increase in periodic payments based on cost of living increases tied to the inflation index. It is also important to understand that the initial lump sum utilized to purchase an Immediate Annuity cannot be cashed since it is an irrevocable one-time purchase.

Immediate Annuity Payout Options

Fixed Period Annuity – Also known as a Period Certain Annuity

Fixed Period Annuity is a term used to describe a specific payout option for an Immediate Annuity contract. When an annuity distribution period begins or the annuitization begins, the annuitant can choose distributions over a fixed period of time. The amount of time is usually a function of many years such as ten or fifteen years during which annual, bi-annual, or monthly payments are made to the annuitant.

Fixed period annuities are usually chosen to cover a period of time during which no other benefits or income is earned. For example, a retiree may choose to purchase an annuity that would pay back over a period of time after regular income has ceased but retirement benefits or other benefits have not yet begun. If the annuitant dies before the annuity has finished paying out, the remaining annuity can be transferred to a beneficiary.

Fixed Period Payout Options:

The Fixed Period Annuity can be structured with several different payout options. An annuity expert can work with you to determine which payout option is best for your unique situation.

  • 5-year fixed period annuity – level payments are made over a period of five years
  • 10-year fixed period annuity – level payments are made over a period of ten years
  • 15-year fixed period annuity – level payments are made over a period of fifteen years
  • 20-year fixed period annuity – level payments are made over a period of twenty years
  • 25-year fixed period annuity – level payments are made over a period of twenty five years

The total sum of money distributed over the payment period is decided upon by the amount paid into an annuity, a shorter fixed period annuity would typically have larger payments to the annuitant than a longer fixed period annuity. Some annuities can also payout for the lifetime of the annuitant, otherwise known as Lifetime Annuities

Lifetime Annuity – Sometimes referred to as a Straight Life Annuity

Lifetime Annuity is a term used to describe a payout option or provision within an Immediate Annuity contract. An individual can purchase an annuity and when the annuity distribution period begins or when the annuitization begins, the annuity will then pay the money back to the individual over a period of time. When the annuity contract contains a lifetime payment provision, the annuity continues to give an income to the annuitant until he or she dies. Individuals can decide on how much is paid to them each time or how frequently payments are made, typically they cannot choose both. Once payment options are chosen, however, they cannot be changed.

Lifetime Payout Options

Lifetime annuities can also come with riders that would provide continued payment to others upon death of the annuitant. These riders typically provide annuity payments to a surviving spouse of the annuitant and are called Joint & Survivor annuities. The following provisions and riders may be attached or added to a lifetime annuity:

  • Joint & Survivor: Level payments are made to both as long as either annuitant is alive.
  • Joint & Survivor reducing on First or Either death: Level payments are made to the annuitant and joint annuitant until one or the other dies.
  • Period Certain provisions to Joint & Survivor Lifetime Annuity: Provides both annuitants with level payments over the course of either lifetime. However, should either annuitant die before the certain period has passed, the remaining annuitant continues to receive the full level payment from the annuity until after the certain period has ended. If both die before the certain period is over than beneficiaries are paid until the end of the certain period.
  • Joint & Survivor reducing only on death of Primary Annuitant: Level payments are made to both the annuitant and joint annuitant.
  • Cash refunds and Installment refunds: Can be added to Joint & Survivor lifetime annuity plans. Variations can be made between the death of one or both annuitants and the payments to survivors or beneficiaries based on the amount left in the annuity. Depending on the type of refund provision, sums may be paid out depending on the death or deaths of either or both annuitants.

Funding an Immediate Annuity

Since all immediate annuities are funded by a single payment or lump sum, they are considered Single Premium Immediate Annuities. Funding options for immediate annuities vary and are considered either Qualified or Non-Qualified funds. If the funds originate from a tax-deferred account such as an IRA, then the annuity can count as a qualified annuity in which the funds are not taxed until the annuity payments are made to the annuitant. Otherwise, the annuity can exist as a non-qualified annuity and can be funded from any source. Portions of payments to the annuitant from a non-qualified annuity are not subject to taxes. Some examples of sources of funding for a single-premium annuity are:

  • Lump sum from a retirement plan payout
  • Transfer of a maturing Certificate of Deposit
  • Sale of a house or estate
  • Sale of investments or mutual funds
  • Proceeds from a life insurance settlement
  • Inheritance

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