An immediate annuity, also known as a single premium immediate annuity (SPIA) or income annuity, is a type of annuity designed to provide guaranteed income payments beginning between one month and one year after the purchase. The payments on immediate annuities are typically fixed for the contract period. However, some companies offer immediate variable annuities that fluctuate based on the performance of an underlying portfolio of securities.
So, in most cases, yes, an immediate annuity is a fixed annuity. Although, there is much more that goes into annuities than simply the fixed or variable nature of an annuity. Today, we’ll take a closer look at immediate annuities so that you can make an informed decision about your finances and decide what type of annuity is the best choice for you.
How do immediate annuities work?
Most people purchase an immediate fixed annuity by paying an insurance company a lump sum. Then, the company promises to pay the person, or annuitant, a regular income according to the terms of their contract. The insurer calculates the amount of the payments based on various factors, such as the annuitant’s age, interest rates, and how long the payments are scheduled to continue. As we mentioned, the payments often begin within the first month after purchasing the annuity.
As the annuitant, you decide how often you want to be paid, known as a “mode.” A monthly mode is the most common payment schedule. However, quarterly and annual modes are also popular options for annuitants. In addition, many people purchase immediate fixed annuities to supplement their retirement income, such as Social Security payments, for the remainder of their lives.
What are the payment term options available for immediate annuities?
Immediate annuities offer several ways to customize your payment options. The first option we’ll cover is the single life annuity. Typical single-life annuities provide payments to the annuitant for their lifetime and stop upon death. However, there are other single-life annuity options as well. Single life annuity with period certain payments can be set to continue to a designated beneficiary until a specified period of time has ended.
Single life annuities with installment refunds provide a designated beneficiary with an amount equal to the original premium paid to buy the annuity should the annuitant die before they’ve received payments equivalent to the premium they paid. The beneficiary will receive payments until they equal the original premium cost. Finally, single life annuities with a cash refund provide a beneficiary with a lump sum equal to the difference between the initial premium cost and the payments the annuitant received before death.
Another payout option for annuities is the joint-life annuity. Joint-life annuities consist of two annuitants, one of which is typically a spouse. These payments continue for as long as either of the annuitants is alive. Joint-life annuities also come in period certain, installment refunds, and cash refunds that operate the same way. Should both annuitants die before the end of the term or before receiving payments equal to the premium costs, a beneficiary will receive payments or a lump sum, depending on the type of joint-life annuity.
Finally, there is the period certain only annuity. These annuities provide payments to the annuitant for a pre-specified amount of time, typically between 5 and 20 years. If the annuitant dies before the specified time frame, a designated beneficiary will receive payments for the remainder of the term. At the end of that term, payments stop no matter if the annuitant is living or not. It’s quite possible to outlive this type of annuity payment option.
Immediate fixed annuities are the best way to provide supplemental income during your retirement.
If you want a guaranteed source of income during your retirement, an immediate annuity may be the perfect solution for you. With various payment options and terms, immediate annuities are tailored to your needs.
