Immediate annuities are insurance policies that convert existing savings to monthly payments. These monthly payments are guaranteed by the insurer. The insurer guarantees the payments for either a set number of years or for your life. Before you can purchase an immediate annuity, you must have a certain amount of money available for the minimum deposit.
The minimum amount of money you need to purchase an immediate annuity varies according to the company you are buying the annuity from. Many insurers do have minimum deposit amounts. These deposit amounts may be $10,000 or $25,000, but in order to benefit from an immediate annuity, you may be required to have at least $100,000. Remember, this money will be paid out over a number of years. As a result, if the dollar amount is too small, your income will also be small.
Annuities are not taxed in the same way that other financial products are taxed. Payments on immediate annuities are mostly a return of the premium, and only a small amount of interest is added to the payment. This portion of the payment constituting interest gain normally amounts to 5 percent or less of the total payment, depending on your age and the insurer that you purchase the annuity from. The only portion that is taxed is the investment gain. The ratio of investment principal to investment gain is called the exclusion ratio.
Immediate annuities cannot be reversed. When you convert your savings, you don't get it back. If you need a lump sum of money, you could be stuck without a realistic solution to raise the money you need. This could place a serious financial hardship on you and your spouse.
If parting with a large portion of your savings sounds like a risky venture, consider only converting part of your savings. This will leave some money aside for emergency purposes. After investing this money, you can always convert more of it at a later time if you find that you do not need it. By always keeping a certain amount for emergency savings, you reduce the likelihood that you will be caught off guard.