How Do Immediate Annuities Work?
Immediate annuities are meant to provide a reliable stream of income so annuitants do not outlive their nest egg. These contracts are typically bought through an insurance company with a lump sum deposit called a single premium. Unlike a deferred annuity when annuity payments are disbursed at a later date, immediate annuity payments are disbursed immediately upon receipt of the lump sum payment. In exchange, the insurance company agrees to provide you with regular payments for a set period of time, or life.
Annuitants can choose several variables of their annuity before they purchase it. Once the contract is signed, however, an annuity cannot be changed. While writing the contract, annuitants can choose how frequently they’d like to receive payments, and how long they’d like to receive payments for. Many people choose the length of their contract based on their estimated life expectancy. It is also common for annuitants to choose a monthly disbursement option, although some also choose quarterly or annual payment plans.
An annuity contract can also be written to accommodate more than one person, such as a married couple. A joint and survivor annuity, for example, pays out to both annuitants until one dies. Whichever spouse lives the longest will continue to receive their annuity payments until their death.
The amount you receive greatly depends on the interest rates and the type of immediate annuity you choose. An immediate fixed annuity are invested in bonds and are considered a low-risk option. These annuities pay out a guaranteed amount. Immediate variable annuities are invested in the stock market or other fluctuating financial tools, and as a result can be considered a riskier choice. While an annuitant may receive a higher amount than they initially invested, they may also lose money from their annuity.