Posts Tagged ‘long term investment’

What is an Immediate Annuity?

Annuities can be very confusing. Many people think of an annuity as a long term investment that you can add money to each month until you retire so you can have a retirement income. This is one way an annuity is built. Another kind of annuity is an immediate annuity. This is an annuity that you purchase with a lump sum of money right at the time you need to start drawing an income.

This was why annuities were originally developed in the first place. People who had saved money all during their working years would put the money into an immediate annuity that would start paying them a monthly income right away. This was a primary way that people could guarantee that they did not out live their retirement savings.

Who Would Purchase an Immediate Annuity?

The purchaser of an immediate annuity would be someone who needs to use the money right away as a source of steady income. This would more times than not be a person who is 65 years old and is retiring from the work place. They may have a company pension and social security benefits starting, but they want to supplement these two income sources with another source of guaranteed income for life.

Many people have become concerned about their pension money because of the economic downturn in recent years. If the company they worked for and get their pension from goes bankrupt they may not be able to rely on their pension for income. A lot of people are also concerned about the future of Social Security benefits. An immediate annuity can help to diversify the risk with their retirement income.

Another type of person who would purchase an immediate annuity may be a guardian for a disabled person. They may be caring for a disabled child or other family member and they want to make sure that they have a stream of income that their disabled family member cannot outlive. This is one way of making sure that the person is cared for even after other family members have died.

What Should You Consider When Purchasing an Immediate Annuity?

One important thing you should consider when purchasing an Immediate Annuity is the credit rating of the insurance company you are purchasing it from. An immediate annuity will more than likely be invested at a fixed rate for a certain period of time. It is critical when purchasing fixed rate annuities that the insurance company not have financial trouble. It is rare for an insurance company to go bankrupt but if they do, fixed annuities can be in jeopardy. The interest and principal are tied to the ability of the insurance company to make payments.

Another thing to consider is obviously the rate of interest you will receive and the other contract options that are available on the annuity. Make sure that you understand the death benefits and chose your contract options appropriately. This would involve deciding if you want the income stream based only on your life or on your life and your spouse’s life.

If you have it based only on your life, you should consider having a 10 year certain or 20 certain. This means that if you die before receiving the majority of the benefits you pay into the contract, your beneficiary will receive at least 10 years minus what you received. If you have a 20 year certain they will receive 20 years of income minus the years you received.

In the event you select to have the income stream based on both you and your spouse’s life, the income payments will be a little bit lower each month, but they will cover two lives instead of one. These are just a couple of examples of how you may choose to have your immediate annuity pay benefits. You should read all the options available to you before you decide which one to select. It will difficult to change later.

How to Fund an Immediate Annuity

You can fund an immediate annuity with money that you have saved over the years in a savings account or in CDs. You may fund it with money that you were putting into a deferred annuity for a number of years.

Many people roll over qualified retirement money into immediate annuities. This would be 401K money or IRA accounts. Qualified money means that taxes have not yet been paid on this money. However, many people opt to use annuities for their retirement money because they feel that the money will be safer and steadier.

They want to have a set income that they can count on rather than dealing with the ups and downs of the investment accounts inside their 401K accounts. An immediate annuity will be set and although the interest rates may change the income stream is much easier to predict.

What Companies Offer Immediate Annuities?

Almost any insurance company that offers annuities will offer immediate annuities. They all have customers that are retiring every day so it would be unusual if a company did not have this product. Just a few names of insurance companies with immediate annuities are MetLife, ING, MassMutual, Prudential and John Hancock. These are just a few. As stated most insurance companies that offer annuities will have an immediate annuity product.

Just make sure that the insurance company has a strong financial ranking. As mentioned before, the insurance company will be the one that determines the security of your future income stream, so just make sure that they are solid. You will want to do some comparison shopping to see who has the best rates for the longest period of time. Also check the income options that each company offers to make sure that you have the best option for your particular situation. If you have a solid company that will pay you a good interest rate, you should not have to worry about this portion of your retirement income.