How Does an Immediate Annuity Work?
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Purchasing Annuities
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You purchase an immediate annuity from an insurance company with a certain amount of money (a single premium). You may begin to collect regular income on your investment in approximately thirty days, or you can postpone payment until a chosen date. Your original investment, your life expectancy and what kind of immediate annuity you choose will determine your payout amount.
Types of Annuities
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You may choose a life annuity, which will pay you a specific monthly amount for the rest of your life or a fixed-period annuity, which generates payments for a pre-determined amount of time. Alternately, you can set your annuity up to pay in one lump sum. If you fund your immediate annuity with the proceeds of a qualified retirement account, such as a tax-sheltered traditional IRA, you will owe income tax on the withdrawals from your annuity. You will pay tax only on the earnings of an annuity that you buy with after-tax dollars.
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Receiving Payments
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An insurance company can only guarantee payouts up to its ability to pay. If the company dissolves through bankruptcy, you may lose your investment. When you die, the regular payout usually terminates, which can leave your heirs with a diminished inheritance. You can lessen your risk by purchasing a fixed term immediate annuity, which continues to pay out until the term expires. You can also elect to name your spouse as the annuity's survivor. When you exercise this option, your annuity payments will decrease.
Profiting From an Annuity
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Consider you age and health before you commit to an immediate annuity. You benefit from this type of investment when you (or your spouse survivor) live long enough to collect at least as much in income as you initially put into the annuity. You begin to profit from the investment when you recoup more than you invested. Avoid a variable rate immediate annuity if you are older and cannot withstand market fluctuations
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