How does an Immediate Annuity work?

The Annuity Man

In the pension-less world that most of us live in, Immediate Annuities are becoming more popular as over 10,000 baby boomers reach retirement age every single day.  If you love your Social Security payments, then you will also love your Single Premium Immediate Annuity (SPIA) lifetime income stream.

Every single retirement should include guaranteed retirement income as part of the overall financial pie.  Let’s look at how Immediate Annuities can help build that needed monthly “income floor.”

Hail Caesar!

Immediate annuities can be traced back to the Roman Times where they were used as pension payments for life, and a gift to the dutiful Roman soldiers and their families.  The Latin word for payment is “annua,” and that is the origin of today’s word “annuity.”  The formal name for an Immediate Annuity is a Single Premium Immediate Annuity.  The acronym commonly used is SPIA.

SPIAs are also referred to as an income annuity, life annuity, payment annuity, and a pension annuity.  The bottom line is that an Immediate Annuity is a contract issued by a life insurance company.  It’s a transfer of risk strategy that guarantees a lifetime income stream...regardless of how long you live.

Life Expectancy Play

As we all know, the older you are when you start your Social Security benefits...the higher that payment will be.  The same thing holds true for Immediate Annuities. They both provide payments that is guaranteed income for the rest of your life.

A question that I get all of the time is “How much will an Immediate Annuity pay?”  That payout amount will primarily depend on when you start the income, and your life expectancy at that time.  Interest rates play a secondary pricing role.  Another factor in the contractual dollar amount of the income stream is the lump sum payment initially placed in the policy.

The basic Immediate Annuity formula for long term lifetime income is a combination of return of principal plus interest, with payments primarily priced and based on your life expectancy at the time you start the income.  You can structure the policy single life or joint life, and you can have the income start paying as early as 30 days from the policy being issued...up to a 1 year deferral time period.

Immediate Annuities are the best type of annuity for what I call “Income Now” strategies. Don’t let an agent or advisor try and fit a square peg into a round hole by selling you variable annuities or another deferred annuity type like an indexed annuity.  For “Income Now” goals, Immediate Annuities are your best contractual choice.

Simple - Efficient -Transfer of Risk

Immediate Annuities are classified as fixed annuities and approved and regulated at the state level.  They are simple and efficient structures with no annual fees and no moving parts.  There are no stock market attachments to the policy at all.

You can attach a contractual increase to the income stream at the time of application. That attachment is called a COLA (Cost of Living Adjustment).  COLAs are a percentage increase that you choose during the application process, and is a contractual guarantee. For example, if you chose to attach a 3% COLA to your Immediate Annuity, the income stream would increase every year by 3% as long as you live.  Sounds great in theory, but remember that annuity companies don’t give anything away and have the big buildings for a reason.  Attaching a COLA significantly decreases the initial payment level when compared to the same Immediate Annuity without a COLA.

By the way, you already own the best inflation (i.e. COLA) annuity on the planet.  In fact, every single American citizen owns it as well.  It’s called Social Security.

The Amazon Annuity

Shopping on Amazon has changed retail selling and customer buying habits forever.  All you want to see are the best choices at the best prices.  It’s a simple pro-consumer concept that Americans have fully embraced.  Finding and shopping for the best Single Premium Immediate Annuity rates should be a similar buying process.

It’s important to find and use an objective Immediate Annuity Calculator that shops all carriers for the highest contractual guaranteed income streams for your specific situation. With Immediate Annuities, not one policy is really better than the other.  You should shop for not only the highest payment number, but combine that with the claims paying ability and ratings of the issuing carrier.

An Immediate Annuity can be your own personal pension plan, and part of your contractually guaranteed income floor.  Most of us need additional lifetime income, so Immediate Annuities might be the personal pension annuity you need to add to your overall retirement plan.  It’s certainly worth a closer look.


Annuity Man Articles