Annuities are a financial vehicle that has long been very popular for retirement planning, and people tend to have a lot of questions about how they work. More specifically, those looking into annuities as a retirement income option often wonder when an annuity begins to make payments.
While there is not one all encompassing answer, as the annuitization process varies from one annuity type to another, in this piece, we’ll zero in on immediate annuities, paying particular attention to when they begin making payouts. Though the answer is implied in their name, there are still subtleties worth going over.
Armed with this information, you’ll be in a good position to evaluate immediate annuities and decide whether they’re right for you.
Though annuities come in many flavors, perhaps the simplest (and the oldest) is the “immediate annuity,” which is sometimes also called a “single premium immediate annuity (SPIA”) or an “immediate income” annuity.
There are many ways of funding an immediate annuity, such as cashing out a mature certificate of deposit from a bank, using funds from a savings or money market account, selling stocks, bonds, or mutual funds, or transferring money from a retirement plan account like an IRA or 401(k), just to name a few. Regardless of the source, you generally fund an immediate annuity all at once in what is known as a “lump sum” or “single premium.”
As a safeguard, all annuities come with a mandated “free-look” period, typically between 20-30 days, depending on the state of issue. During this period of time, you can change your mind and return the policy for a full refund. After the expiration of the “free-look” period, you are locked into the annuity’s terms.
Annuities are, in essence, contracts meant to provide a sense of security. They are signed between the owner/annuitant, who purchases the annuity, and the insurance company that issues it. One of the primary purposes of annuities is to ensure a guaranteed monthly income, particularly during retirement, which is precisely the sort of financial certainty that puts people’s minds at ease.
Immediate annuities also serve a similar purpose, but they’re distinguished by the fact that their payouts begin much sooner than is the case for other types of annuities. In this context, “immediate” doesn’t necessarily mean “as soon as you sign the contract,” but the payouts on immediate annuities have to begin somewhere between a month and a year after the contract is issued.
As is usually the case, immediate annuities can be structured in various ways, each with pros and cons. As you think about buying an annuity, this context should help you make the best decision for your particular circumstances.
First, single-life immediate annuities only make payments while the annuitant is still alive. Then, there are “life with period certain” annuities that will pay throughout the annuitant’s life but will also continue making payments to a beneficiary for an agreed-upon length of time (usually 5-20 years) if the annuitant dies before that time is up. One persistent myth about annuities is that they only pay out through a single lifetime, but as you can see, some options do not have this limitation.
It’s also worth discussing “installment refund” immediate annuities. These, too, pay for the duration of the annuitant’s life, but if the annuitant passes away before receiving a sum of payments equivalent to the premium they paid into the contract, their beneficiaries will continue receiving payments until that threshold has been met.
Finally, we’ll touch on “cash refund” immediate annuities. These are much the same as installment refund immediate annuities, but the beneficiary receives the difference between the original premium deposit and the amount paid out so far as a lump sum.
Annuities are well-known for being extremely configurable, and this barely even scratches the surface of what’s possible. Check out the AnnuityAdvantage Blog for all the latest information.
There are many advantages to immediate annuities, including:
Immediate and deferred annuities cater to distinct financial needs, making the choice between them is dependent on one’s immediate and long-term income requirements. Immediate annuities are ideal for those needing cash flow promptly, as they start paying out shortly after purchase, although they lack the tax-deferred growth benefits of deferred annuities.
On the other hand, deferred annuities are suitable for those looking to grow their investments in a tax-advantaged way, and they benefit from the additional interest that compounds when taxes are delayed. However, these may not be suitable if you require immediate access to your funds or need to generate income immediately because they typically require you to lock up your money for a number of years.
Choosing the right annuity requires carefully examining the contract and comparing the offerings from different insurance companies. This is the only way to ensure your annuity aligns with your financial goals. For this reason, trust in the annuity firm advising you is crucial, given the impact these decisions have on your retirement planning.
A high-quality annuity agency will thoroughly explain the options and their implications to you, allowing you to make an informed decision without pressure. Of course, you can always contact us for more information. We’ve got decades of experience with annuities, and we can put that experience to work for you as you explore all of your options. Give us a call, we’d love to hear from you!
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