Immediate annuities (also known as payout or income annuities) require you to pay to an insurance company. The insurer will send you a stream of payments, starting right away. These annuities come in two varieties.
* Immediate fixed annuities. You’ll get the same amount each month, as long as the annuity lasts.
* Immediate variable annuities. A fixed payout may not be attractive because that fixed amount is likely to lose value over the years, as prices increase. Some immediate variable annuities have payments that are indexed to inflation. You’ll start with a lower amount but your payments will grow over the years. Another choice is an immediate variable annuity in which you choose among investment accounts, hoping they’ll perform well enough to increase your payments.
Immediate annuities may make sense for people 65 and older. The older you are when you buy one, the more cash flow you’ll receive and the greater the portion of each check that will be a tax-free return of capital.
When you buy an immediate annuity, you can choose the terms of the contract. Here are some common choices:
* Straight life annuity. This type of annuity will pay one person for as long as he or she lives. That might be one month or 50 years.
* Joint annuity. A married couple might make this choice. It will pay as long as either spouse is alive.
* Period certain annuities. This type of annuity can be on one person’s life, the same as a straight life annuity. However, the insurer agrees to make payments for at least, say, 10 years. If the annuitant dies within 10 years, payments to a beneficiary will continue until the 10-year term is completed. Period certain annuities are available for many different lengths of time.
Joint annuities and period certain annuities have smaller payouts than a straight life annuity. You need to decide if protecting a spouse or another beneficiary is worth the reduced cash flow while you’re alive.