Immediate Payment Annuity
What Is an Immediate Payment Annuity?
An immediate payment annuity is a contract between an individual and an insurance company that pays the owner, or annuitant, a guaranteed income starting very quickly. It contrasts from a deferred annuity, which starts payments sometime not too far off picked by the annuity owner. An immediate payment annuity is otherwise called a single-premium immediate annuity (SPIA), an income annuity, or essentially an immediate annuity.
How an Immediate Payment Annuity Works
Individuals commonly buy immediate payment annuities by paying an insurance company a lump sum of money. The insurance company, thus, vows to pay the annuitant a customary income, as per the terms of the contract. The amount of those payments is calculated by the insurer, in light of such factors as the annuitant's age, winning interest rates, and how long the payments are to proceed.
Payments commonly start in no less than a month of purchase. Annuitants can likewise choose how frequently they need to be paid, known as a "mode." A month to month mode is most common, yet quarterly or annual payments are additionally an option.
Individuals frequently buy immediate payment annuities to supplement their other retirement income, like Social Security, until the end of their lives. It is likewise conceivable to buy an immediate payment annuity that will turn out revenue for a limited period of time, like 5 or 10 years.
The payments on immediate payment annuities are generally fixed for the period of the contract. Notwithstanding, a few insurers likewise offer immediate variable annuities that change in view of the performance of an underlying portfolio of securities, similar as deferred variable annuities. Still another variation is the inflation-protected annuity, or inflation-indexed annuity, which vows to increase payments in accordance with future inflation.
Immediate payment annuities address a bit of a bet: Annuitants who kick the bucket too before long may not make out really well, while the individuals who carry on with a long opportunity can arrive out ahead.
Special Considerations
One expected drawback of an immediate payment annuity is that payments regularly end upon the death of the annuitant, and the insurance company keeps the leftover balance. So an annuitant who passes on sooner than expected may not get the best possible deal out of the deal. Then again, an annuitant who lives longer might outpace the competition.
There are far to get around this problem. One is by adding a second person to the annuity contract (alluded to as a joint and survivor annuity). Likewise conceivable to buy an annuity guarantees payments to the annuitant's beneficiaries for a certain period, or that will refund the annuitant's principal assuming the annuitant bites the dust early (known as a cash refund annuity). Such provisions cost extra, notwithstanding.
When purchased, an immediate payment annuity can't be canceled for a refund. This might represent a problem should the annuitant need the money in a financial emergency. Consequently, it's smart to have a emergency fund set to the side for unanticipated requirements before concluding how much money will be put in the annuity.
Features
- Immediate payment annuities are sold by insurance companies and can turn out revenue to the owner very quickly after purchase.
- Buyers can pick month to month, quarterly, or annual income.
- Payments are generally fixed for the term of the contract, yet variable and inflation-adjusted annuities are additionally accessible.
