Nested Interest

An immediate annuity is a form of insurance issued by a life insurance company that provides periodic payments to the beneficiary, or annuitant.  Immediate annuities are purchased with a single premium payment when purchasing the annuity, and the only benefit received afterward are the specified benefit payments – immediate annuities do not have a cash value from which withdrawals can be made, distinguishing them from “deferred annuities”.

While immediate annuities are most commonly known to provide fixed payments for the lifetime of the annuitant (often referred to as a “pure life” annuity), other benefit forms can also exist, including:

Periods Certain – payments are made over a specified period of time, and are payable regardless of whether the annuitant is alive or not.

Certain & Life – payments are first made over a specified period of time, regardless of whether the annuitant is alive or not, which is the “certain period”; if the annuitant is still alive after the period certain, payments continue for the remaining lifetime of the annuitant.

Joint Life - this is when the payments are dependent upon the survival of two individuals, instead of just one.  Often payments may reduce by a specified amount upon the first death, and then stop completely upon the second death.  This form may also be used with a certain & life arrangement.

COLA – annuity benefits may also have a cost of living adjustment, or “COLA” which automatically increases the benefit by a specified percentage each year, intended to allow benefits to keep pace with inflation.

Inflation Adjusted – some annuities have their benefit payments indexed to the CPI, proving a more direct hedge against inflation risk than a COLA.

Variable Income – one form of an immediate annuity, called a “variable immediate annuity”, adjusts the benefits paid to the performance of a designated set of funds selected by the annuity holder.  This allows the beneficiary to participate in the risk and rewards associated with the underlying investments, potentially allowing benefits to increase over their retirement.

Equity Indexed – equity indexed immediate annuities link the benefit payments to the return of a specified indexed in a formulaic manner, but typically impose a floor that results in a guaranteed minimum income amount.

Immediate annuities are often referred to a “payout annuities” to distinguish them more prominently from “deferred annuities”, which are not yet making structured payments to a beneficiary but, instead, carry a cash value that may be applied toward the purchase of an immediate annuity in the future, or withdrawn for cash.

Immediate annuities are an important part of a retirement income plan as they are the only financial product available that guarantees income to the beneficiary for his or her entire life, providing protection against longevity risk.