Immediate Annuity
What Is an Immediate Annuity?
An immediate annuity is a type of annuity that begins making payments shortly after the initial investment is made. Typically, payments start within one year of purchasing the annuity.
Immediate annuities are often used by retirees who want to convert savings into predictable income.
Why It Matters
Immediate annuities provide financial stability by offering regular income payments soon after retirement. This can help retirees cover living expenses and reduce concerns about market volatility.
The predictable income stream can serve as a replacement for a paycheck.
How Immediate Annuities Work
The policyholder pays a lump sum to the insurance company.
In return, the insurer agrees to provide regular payments for:
- a specific number of years
- the lifetime of the annuitant
- the lifetime of two individuals (joint annuity)
Payment amounts depend on the investment amount, age of the annuitant, and interest rates.
Example
A retiree invests $150,000 in an immediate annuity and begins receiving monthly income payments one month after purchase.
Immediate Annuity vs Deferred Annuity
- An immediate annuity begins payments shortly after purchase.
- A deferred annuity delays payments until a future date.
FAQs About Immediate Annuities
How soon do payments begin?
Payments typically begin within one year of purchase.
Are payments guaranteed?
Payments are guaranteed according to the annuity contract.
Can payments last a lifetime?
Yes. Many immediate annuities offer lifetime income options.
Related Terms
