All Things Annuities Immediate Annuity

Immediate Annuity Contracts


Introduction

Immediate Annuities are the most basic type of annuities currently offered in today’s market. Unlike deferred annuities, they boast simplicity, lacking the intricate components found in their counterparts.

Pension annuity, Annuity pension

Therefore, this post’s structure will differ from my previous product posts as the “Five Annuity Elements” I’ve referenced do not apply here. While functioning similarly to a pension, Immediate Annuities offer customization options that distinguish them from formal pension plans.

This post aims to deliver a comprehensive overview, covering what they are, how they work, their advantages and disadvantages, and crucial industry insights for every prospective annuity buyer.


What is an Immediate Annuity?

Immediate Annuity

An Immediate Annuity is a contract issued by Life Insurance companies that converts a lump sum premium payment into a steady stream of income payments. The income start date is what sets an immediate annuity apart from deferred annuities, as the income from an Immediate Annuity must start within 12 months of the issue date.

How does an Immediate Annuity Work?

The insurance company coverts the premium payment(s) into a stream of income payments through a method known as “annuitization.”

The owner of the annuity selects payment periods.

What is Annuitization?

Below is a short snippet on annuitization from a previous post.

“Once you annuitize your contract, you are trading your cash value for guaranteed payments that continue based on the payment period you selected (lifetime, joint lifetime, period certain, etc.).

*Insurance companies will consider various factors to determine the payment amount, such as the annuitant’s life expectancy, the cash value, the selected payment period, etc.)

The benefit? Your income will continue for the requested period (lifetime, joint lifetime, or a specified period). For example, if you choose the single-life payout, then payments will continue no matter how long you live.

The risk? Suppose you chose the straight single-life payment option and you suddenly pass away a couple of years after payments had started. In this case, since you didn’t select a “period certain” option, the insurance will keep any remaining cash value in the annuity.”

Therefore, you should always consult with your advisor or annuity specialist before starting payments because once annuitized, it is irreversible.


Immediate Annuity Payout Options 

Annuitants are often provided a variety of payment installment periods that they can choose from. 

The most common payment options offered are below:

Single Lifetime Payments

  • Guaranteed income payments for the duration of the annuitant’s lifetime.
  • Benefit: Higher lifetime payments than joint-life payments.
  • Drawback: Payments stop upon the annuitant’s death, even if the income just started.

Joint Lifetime Payments

  • Guaranteed income payments until the death of the last annuitant.
  • Benefit: It provides peace of mind that your spouse’s income needs are accounted for.
  • Drawback: Payments are lower than Single life payments.

Period Certain Only

  • Guaranteed income payments for a specific period.
  • Benefit: If the annuitant passes in the middle of the selected period, the payments will continue to the beneficiary for the remaining period.
  • Drawback: Not a lifetime payment option.

Life With Period Certain

  • Income payments are guaranteed for the annuitant’s lifetime, with an added provision: if the annuitant passes away within a specified period (typically five, ten, 15, or 20 years), payments continue to the beneficiary for the remaining duration of that period.
  • Benefit: In contrast to the single lifetime payment option, if the annuitant passes away during the specified period, payments will persist for the beneficiary until the completion of the specified period.
    • Example: If an annuitant selects the “Single Life with a 10-year period certain” and passes away five years after the income started, then the beneficiary will continue to receive the income payments for the remaining five years.
  • Drawback: Payments are lower than straight single-life payments.

Standard Death for Immediate Annuities


Unlike other annuity products, Immediate Annuities generally have no death benefit. There are, however, a couple of ways to work around that:

Straight single life annuity payment
  1. Period Certain Payment Options: Period certain payments offer a little more flexibility in terms of liquidity. As referenced above, beneficiaries will receive any remaining payments if the annuitant passes in the middle of the selected period.
  2. Cash Refund Rider: Some insurance companies offer a rider for Immediate Annuities called a ‘Cash Refund Rider.’ This provides flexibility for beneficiaries by distributing any remaining funds from the original investment to the designated beneficiaries in one lump sum payment. Some contracts may offer additional distribution options.

“Premium(s)” is the original or total investment amount.


Advantages of Immediate Annuities 

  • Payments can start as soon as 30 days after the issue date.
  • A steady stream of payments.
  • Practical tool for income supplementation.
    • Example: Immediate Annuity payments can be used to cover income gaps if you wish to delay and maximize social security payments.
  • Possible tax advantages for non-qualified contracts.
  • Various payment options.
  • Transparent and easy to understand.

Disadvantages of Immediate Annuities 

  • Lack of Liquidity 
  • Irreversible. Unlike deferred annuities, once contract terms are selected and the contract is issued, it cannot be surrendered.
  • Immediate Annuity funds will no longer be a part of inheritance assets. In the event of the annuitant’s passing, any remaining payments or remaining premium(s) that have not been paid out stays with the insurance company and will not be distributed to the contract owner’s beneficiaries unless:

A “period certain” payment option was elected

OR

A “cash refund” rider was added to the contract and exercised.



Disclaimer: The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security, investment, or insurance product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.


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