Immediate annuities are a type of income annuity offered by an insurance company that can provide a steady income stream during retirement. When you purchase a single premium immediate annuity (SPIA), you make a lump sum payment to the insurance company.
In return, you’ll receive annuity payments, which can last for a certain period or provide lifetime income based on your annuity contract terms (life or term).

This type of annuity can be a valuable tool for managing retirement savings converting a portion of your savings into a guaranteed stream of retirement income. This can be especially beneficial for retirees who worry about outliving their savings and want the security of guaranteed income payments.

An Immediate payment annuity differs from a deferred annuity, where your money is invested for a period until you choose to start receiving payments at a later date. With an immediate annuity, the income payments begin shortly after the insurance company gets the lump sum.

Adding an immediate annuity to your retirement plan can increase your income alongside other sources like Social Security benefits or life insurance payouts. This offers reassurance that you’ll have a steady and reliable income in your retirement years.
To help you understand how immediate annuities can aid in retirement planning, let’s examine them more closely.

Understanding Immediate Annuities

Immediate annuities are unique in the annuity market because of their quick payout structure. As previously mentioned, once you make a lump sum payment to the insurance company, the annuity payments begin almost immediately. This is the primary differentiator from other annuity types, such as deferred annuities, where there is a period of accumulation before the payout phase begins.

The main goal of an immediate annuity is to convert a portion of your retirement savings into predictable and steady future income payments.

One important aspect to consider is the irreversibility of an immediate annuity contract. Once the contract is annuitized, meaning the income payments have started, the contract typically cannot be reversed or changed. The lump sum payment used to purchase the annuity cannot be withdrawn or accessed like a regular savings or investment account.

Therefore, consider this lack of liquidity in your overall financial planning when considering an immediate annuity.

Types of Immediate Annuities

Immediate annuities come in many forms, each with distinct characteristics. Understanding these variations can help you optimize your retirement income strategy.

Fixed Immediate Annuities

Imagine having a steady, reliable income that lands in your bank account like clockwork. That’s the beauty of Fixed Immediate Annuities. You send a one-off lump sum payment to the insurance company, and they give you regular annuity payments.

What many retirees like about this arrangement is its predictability. Your income stream is set in stone from the get-go. No matter what the stock market does or how the economy shifts, your annuity income remains the same.

However, though the stability of fixed rates is comforting, they may not keep up with inflation. Over time, the real value of your annuity payments could decrease.

Variable Immediate Annuities

Unlike their fixed counterparts, variable immediate annuities offer a chance for your annuity income to grow over time. Here’s how a variable immediate annuity works: you make a lump sum payment to an insurance company, just like with a fixed immediate annuity. But instead of receiving a fixed income stream, your payments can fluctuate based on the performance of underlying investments.

You choose from a selection of investment options, often mutual funds, and your annuity payments will rise or fall based on how well these investments perform. Thus there’s a chance for your income to grow, potentially helping it keep pace with inflation.

But with the growth potential comes increased risk. If the investments don’t perform well, the income from your annuity could decrease. This is the key difference between variable and fixed immediate annuities. While fixed annuities offer a steady, predictable income, variable annuities provide a chance for growth but with more uncertainty.

Index Immediate Annuities

Moving on to Index Immediate Annuities, these are a bit of a hybrid between fixed and variable immediate annuities. As with other types of immediate payment annuities, you purchase it with a lump sum, and the insurance company promises to provide you with regular annuity payments. The difference is that these annuity payments are linked to the performance of a market index like the S&P 500; hence their amount varies accordingly.

If the market index performs well, your annuity income can increase. But unlike a variable immediate annuity, there’s usually a cap on how much your income can increase.

Conversely, your income won’t decrease below a certain minimum level if the market index performs poorly. This provides a safety net and offers more stability than a variable immediate annuity but with more potential for growth than a fixed immediate annuity.

Term Immediate Annuities

Let’s now turn our attention to Term Immediate Annuities. Instead of providing an income for life, term immediate annuities promise to pay you a regular payment for a specific period or term.

Term immediate annuities can be useful if you have a set timeframe in mind for receiving additional income.

One advantage of term immediate annuities is that they often offer higher annuity payments than life annuities since they are spread over a shorter period. The trade-off is that the income stops at the end of the term.

Lifetime Immediate Annuities

We’ll just touch briefly on lifetime income immediate annuities, as they are pretty self-explanatory. They are designed to provide a steady income stream for the rest of your life. However long you live, you’ll have a guaranteed income.

Benefits of Immediate Annuities

While immediate annuities aren’t for everyone, their numerous benefits can make them an attractive option for many retirees.

  • Uncomplicated – While some financial products leave you scratching your head, immediate annuities are relatively simple. When setting up an immediate annuity contract, all you have to do is pay the lump sum, and the insurance company will begin sending you payments.
  • Guaranteed Income – Once you purchase an immediate annuity, you’re assured of receiving regular payments for the contract term or life.
  • Instant payments – If you want to start receiving payment asap, then immediate annuities are a great option. The majority of other investments require you to wait until an accumulation period is completed before they allow you to start withdrawing your money.
  • Retirement Income Streamlining – Providing a predictable and steady flow of funds can simplify your financial management, allowing you to focus more on enjoying your retirement and less on juggling your finances.
  • Mortality Credits – within a group of annuity purchasers, some individuals will live longer than expected, while others will have shorter lives. The funds from those who pass away earlier than expected are pooled and used to continue paying the annuities of those who live longer. These are known as mortality credits, and they can increase the yield of an annuity for those who live longer than average.
  • Customization – Some immediate annuities offer customization options that can be tailored to meet certain requirements. The Cost of Living Adjustment (COLA) rider and beneficiary-friendly provisions are two notable options.

The COLA rider is an add-on that adjusts your annuity payments to keep pace with inflation. While this feature can help maintain your purchasing power over time, it typically results in lower initial payments.

In some instances, you can make your immediate annuity beneficiary-friendly. Options like “Life with Cash Refund” ensure that if you pass away before receiving payments equal to your initial deposit, the remaining amount goes to your heirs.

Disadvantages of Immediate Annuities

To provide some balance, we should acknowledge that immediate annuities, like any financial product, have their downsides.

  • Lack of Liquidity – Your money is locked in once you purchase an immediate annuity. You can’t withdraw a large sum or terminate the annuity without facing substantial fees or penalties. This lack of liquidity can be a disadvantage if you need access to your funds for unexpected expenses.
  • Inflation Risk – If you choose a fixed immediate annuity, your payments will remain the same over time. Though it provides a predictable income, your purchasing power could decrease over the years due to inflation, especially if you have a long retirement.
  • Short Lifespan Considerations -If your lifespan is shorter than average, you might not fully recoup the amount you paid for your immediate annuity. These annuities promise guaranteed income for life, but if life is cut short, you may not receive an equivalent return on your investment. But, as we all know, predicting our lifespan isn’t an exact science!
    Still, it’s a risk inherent in any life-contingent financial product and something to consider when weighing the pros and cons of an immediate annuity.
  • Insurance Company Issues – If the insurance company that sold you the annuity goes out of business, your income could be at risk. While there are state guaranty associations that provide some level of protection, it’s important to buy an annuity from a reputable, financially stable company.

Immediate Annuities vs. Deferred Annuities

The real difference between immediate and deferred annuities is the timing of the income payments. With an immediate annuity, the income payments start soon after the annuity is purchased. With a deferred annuity, the income payments start at a later date, allowing for a period of potential growth.

Both types of annuities can provide a steady income in retirement, but they serve different purposes.

Let’s take two friends, Alice and Bob. They’re both planning for retirement, but they have different financial situations and goals. Alice wants to retire soon and is looking for a way to start receiving income immediately. Bob’s not planning to retire any time soon; he wants to carry on working for a few more years and grow his retirement savings first.

Alice might find an immediate annuity to be a great fit. As we’ve discussed, with an immediate annuity, Alice would make a lump sum payment to an insurance company, and she’d start receiving regular income payments almost right away. This could provide Alice with the steady income she needs in her retirement.

Bob, however, might be more interested in a deferred annuity. With a deferred annuity, Bob would also make a payment (or series of payments) to an insurance company. But instead of starting to receive income right away, Bob’s money would be invested for a period of time, known as the accumulation phase. During this phase, Bob’s money could grow tax-deferred. Once Bob is ready to retire, he can start receiving regular income payments from the annuity.

The Bottom Line

Wrapping up our discussion on immediate annuities, it’s clear they can play a pivotal role in shaping a comfortable retirement. They offer the promise of steady income, providing a financial safety net for your golden years. But, as with all financial decisions, a clear understanding is required to make the best choices for your unique retirement situation.

This is where the team at Annuity Association steps in. We have a dedicated team of advisors spread across the U.S., ready to demystify the complexities of annuities for you. Our mission? To ensure you’re equipped with the knowledge to make decisions that best serve your retirement income needs.

Jeremiah Konger
Jeremiah Konger
CEO at Annuity Association

Jeremiah understood his whole life the importance of community and caring for those who are a part of it. Starting his first business venture at the age of 23, he gained invaluable experience in working with others for a joint purpose.
He founded his first wireless retail business in 2011, expanding it from one store to 12 locations across the state in just three years.
Once he sold his company, Jeremiah began the journey he’s on today, using his talents and experience to work with seniors in order to help them find the best means of financing their retirement plans.

He’s found his true calling working as a proud member of the Annuity Association, assisting retirees in building their safe financial future.