Immediate Annuities
Income for Life - Combining Immediate and Deferred Annuities
With the increasing lifespan of our country's population, the retirement years are stretching even further over the horizon than ever. Statistics now indicate that large numbers of the retired will live to be 90-100 years old, placing a greater burden on the present funding for retirement.
Couple this with the recent losses in the stock market over the last few years, and the growing trend among large companies to reduce pension benefits, retirees have begun to question whether they are adequately prepared for their retirement. Many have begun looking around for ways to ensure they don't run out of money before they run out of time.
Some potential retirees are choosing to work longer in an attempt to build a bigger nest egg. Others are reducing the amount of income necessary by downsizing their home or paying off debt earlier. And in order to insure a lifetime of income, many are turning to single premium immediate annuities in tandem with the more traditional deferred annuity to insure their security in retirement.
How does it work? To begin with, the purchase of an immediate annuity offers the option of choosing a payout method. This can be for life, restricted to a certain time period, or a joint and survivor method, which will continue to pay after the death of the first spouse. The idea of a guaranteed income, no matter how long you should live, is a definite plus considering the uncertainty in other types of investments.
The purchase of a deferred annuity along with the immediate annuity provides the retiree a vehicle for long-term tax-deferred growth that would not be available from other investments such as savings accounts or CDs. Because of the increasing lifespan of retirees, many are able to take advantage of the compounded growth the tax-deferral offers, increasing their return and providing additional income down the road should it become necessary.
The combination of these two plans offers the retiree a sense of security that would be hard to duplicate with any other type of investment. The idea of a guaranteed income, coupled with long-term tax-deferred growth is the ideal scenario for most seniors. Coupled with the flexibility of structuring the payout to fit their needs, the combination of deferred and immediate annuities can provide a peace of mind that a major source of income will continue uninterrupted over the course of a lifetime.
Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1/2, may be subject to a 10% federal income tax penalty.
Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.
An immediate annuity is an agreement between you and your insurance company which, simply put, states: You will immediately pay the insurer a lump sum of money. The insurer, in return, will start making regular monthly payments to you, and do so normally for the rest of your life. The immediate annuity starts paying you money immediately (or very shortly after, usually within a year) upon the signing of the contract.
There are numerous benefits to you when you purchase an annuity. First, your future income is guaranteed for the rest of your life. The risks you were facing before purchasing an annuity – economic instability, or simply running out of funds at an advanced age – all these are now assumed by the insurer. Second, you no longer have to spend time managing your money. The insurance company invests the money in your stead, and pays you the agreed upon amount every month. The third benefit is tied to the second – there are no direct administration or transaction fees on your money, as there would be with most investment and savings plans. The fourth benefit comes in the form of high returns – annuity interest rates are generally higher than Certificate of Deposit (CD) or Treasury rates, and since a portion of the principal is paid out each time, the monthly payments are greater than the accrued interest alone. Depending on the type of annuity you select, you may also be able to save on taxes.
The basic arrangement, what is known as a Straight Life Annuity, tends to yield the highest interest. However, that type of annuity may not be the best choice for you, and insurance companies are prepared to offer you many choices. Some of these are listed below:
- Period Certain Annuity: The money is guaranteed to be paid out for the defined period, to you or, should you pass away before the period ends, to your beneficiaries. Note that you may outlive this annuity.
- Period Certain & Continuous Annuity: The income is guaranteed for your lifetime, but should you pass away before the end of the period, your beneficiaries are paid the annuity until the period end.
- Joint & Survivor Annuity: Two people receive the full monthly payment. Should one of them die, the other continues to receive a pre-determined portion of the annuity payments (generally 50%-75%).
- Variable Income Annuity: In a fixed income annuity, the amount you receive each month is pre-determined. You may purchase a variable income annuity, instead, in which your monthly payment is directly tied to how well the investments of your choice performed. You may also combine the two, guaranteeing a portion of your monthly payment, and potentially earning a higher return on the variable income portion.
This list is anything but complete; you should consult a professional insurance broker to determine which variation, or combination of variations, will be most suited to your needs.
An immediate annuity can be an extremely effective and versatile tool for ensuring your financial future. Our expert insurance professionals can help you determine the best combination of annuity options for you