Two Types of Annuities

All annuities can be broken down into either one of two types: deferred or immediate. Deferred annuities are tax-deferred accounts in which the owner makes either a lump-sum premium payment (such as a rollover from a 401k or IRA) or makes systematic payments over the course of many years. Immediate annuities work much differently. The owner will transfer a single-sum balance to the insurance company and, in return, the insurance company will make payments to the owner based upon certain criteria agreed upon beforehand.

Annuitization

Annuitization is the point in time when an insurance company begins making payments to the owner or beneficiary of an annuity. Typically, once annuitization begins, the owner is not allowed to change any of the contract specifics. For example, if the annuity payment is set up as life and 10-year certain, the insurance company will make payments to the owner for the rest of his life and a minimum of 10 years. This means that if the owner dies after five years of annuity payments, the insurance company will still make payments for another five years (10-year certain) to a preset beneficiary of the owner's choosing. The owner can also just receive a straight-life payment (no period certain), which will result in the highest monthly or annual payment to the owner because the insurance company is taking less risk. If the owner dies earlier than expected, the insurance company only has to pay out a certain amount and keeps the difference.
Another common payout strategy is called joint survivor. This mean the insurance company will make a regular payment to the owner for the rest of his life. Upon the death of the owner, the insurance company will continue paying (usually a lesser amount) to the owner's beneficiary for the rest of her life. People use immediate annuities to guarantee that they won't outlive their assets and have a guaranteed paycheck for the rest of their life.

Liquidity Features

A knock against immediate annuities is that they don't provide much liquidity other than their scheduled monthly or annual payment. This used to be the case, however, many insurance companies today offer more features and benefits to make their immediate annuity products more attractive. In today's immediate annuity marketplace, features such as accelerated payments and death benefits give owners more choices on how to make their retirement income last. Accelerated benefits allow for an increase in the scheduled monthly payment. Of course, this will reduce the amount the owner will receive in the future, but it allows the owner the discretion to receive more income today if he feels it's necessary.
Another popular feature today is a death benefit on the remaining amount or unused portion of the annuity. Insurance companies can offer annuity owners (with a reduction in the monthly or annual payment) the option to return their unused balance to their beneficiary so that little or no money is left on the table.

Immediate Annuities Everywhere

You may not realize it, but immediate annuities are everywhere. Lottery winners can choose to have a payment for life instead of a lump sum. An immediate annuity is used. Anyone who has a defined benefit plan (or pension) at work will receive an immediate annuity payment when they retire. Perhaps the largest immediate annuity program in the world is the U.S. Social Security system. When someone begins drawing Social Security, no matter their age, they are receiving an immediate annuity payment guaranteed for the rest of their life.

Who to Call

If you interested in learning more about immediate annuities or how they can help you plan for retirement, call your local insurance agent or financial professional.