Another valid question to ask is “What is an immediate annuity?” Don’t get confused, because there will be times when you see this type of annuity being referred to as a payout annuity or income annuity. They are the same.
It’s not a real complicated concept, the immediate annuity. It is essentially just a life insurance package. A life insurance policy usually promises a lump sum payment to your beneficiary upon your death.
The difference here is that instead of making regular payments of premium to your insurance company and getting a lump sum payment in the end, you make the lump sum payment up front and the insurer will give you a regular payment of income up until your passing.
Other Immediate Annuity Options
There are some other options rather just collecting money up until the time of your death. You can actually opt in for a specific time period, such as ten years or twenty five years, to get just the right payments you need until death. Or you can collect until your passing, and then your spouse can collect the rest until the stash is depleted.
Why is it Called an Immediate Annuity?
The reason it is called an immediate annuity is because you begin collecting your payments as soon as you invest your money. This is a good option for someone who is already retired but comes across a large sum of money in their elder age. They can still access this money but it will trickle out to them slowly as they cash out.
Another bonus of the immediate annuity is that a deferred annuity may be converted into one if you decide you need the income now. There will be some fees associated with this, of course, as you will learn in the next article about the pros and cons of the immediate annuity.
If you really think about this type of annuity, you may find it very beneficial if you fit a certain characteristic of investor. You may actually want someone help you regulate your spending in retirement, or maybe you have a large sum of money sitting out losing money based on inflation. The interest rate you collect on that sum can help you deflect some inflationary losses.