Annuity Basics

Immediate vs. Deferred Annuities (Part 1)

Do you want income now or income later?

When you purchase an annuity, you can choose between an immediate annuity - if you want the income right away – or a deferred annuity - if you want the opportunity to build your account value over time and convert it to income in the future.

Immediate Annuity
When you purchase an immediate annuity, you make a single lump-sum payment and set the starting date for the payout to begin sometime within 13 months. The term and the amount you’ll receive are determined by the annuity contract.

With an immediate annuity, you control the term: You can choose income for your lifetime (known as a life annuity) or for your lifetime and that of another person (known as a joint and survivor annuity). You can also add a guarantee period to a lifetime income payout option, under which your beneficiaries will receive the payments remaining in the guarantee period should you die before the end of the period. You can also choose between time-specific or amount-specific payout possibilities.

What You Receive:
The size of the monthly payment you’ll receive, on the other hand, is set by the annuity provider based on:

• How much you invest in the annuity (annuity principal)
• The payout option chosen
• Whether you have chosen a fixed annuity or variable annuity
  Note: Some variable annuity contracts may permit you to choose between receiving annuity payments that are fixed in amount or annuity payments that vary based on the performance of the underlying investment subaccounts.
• Personal factors, including your age and, if it’s a joint and survivor annuity, the age of the other person

The Immediate Advantage:
There are certain advantages offered by an immediate annuity that can make it an attractive choice for retirement income.

Principally, an immediate annuity can help ease the concerns people may have about managing a diversified investment portfolio or, even more frightening, of outliving their assets.

As an example, someone who has just received a large sum of money—an inheritance, a bonus, or profits from selling a home or a business—but really needs a steady source of income can choose an immediate annuity. Also, many experts suggest that anyone who expects a lump sum pension or 401(k) distribution might consider an immediate annuity as a way to convert their funds into a stream of income they can’t outlive.

How to Choose a Contract:
The primary reason that many people used to choose a fixed immediate annuity was for the guaranteed annuity payments it promised. However more recently, low interest rates and the potential for strong equity performance have created an increased interest in variable immediate annuities.

Because the guarantee of principal and return of a fixed annuity is based on the claims paying ability of the insurer, the reason to choose a fixed immediate annuity usually comes down to which highly-rated fixed annuity company provider will guarantee the largest regular income for the term selected. However, income amounts vary because each fixed annuity company may use different annuity purchase rates for determining the annuity payments they make.

As an example, a 55-year-old widow who buys a $100,000 immediate annuity, and elects to receive monthly annuity payments for the rest of her life, might receive anywhere from $611 to $766 each month depending on the fixed annuity company provider. If she lived for 35 years—to age 90—the difference could amount to more than $65,000.

In choosing a variable immediate annuity, most annuity contracts allow you to choose to have your annuity payments last for a set period of time (such as 20 years) or for an indefinite period (such as your lifetime). During payout your contract may allow you to choose between receiving annuity payments that are fixed in amount or annuity payments that vary based on the performance of the underlying investment subaccounts. There are many factors to take into account, including the potential performance of the investment portfolios in the contracts being considered, the options offered, the annual expenses of the contracts and whether or not you are willing to take the risk that your account may decrease if the underlying investments perform badly. Our planners and financial specialists can provide assistance to evaluate the alternativesand determine what would work best for your personal investment plan.

Immediate vs. Deferred Annuities (Part 2)

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