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David Lerner Associates: Providing Lifetime Income with Immediate Annuities

Lacking income is a primary concern for most retirees. Immediate annuities offer a financial alternative to assist in meeting retirement income needs by offering a steady stream of income tailored to continue through retirement.

An immediate annuity is a contract between you and an annuity issuer (an insurance company) to which you pay a single lump sum of money in exchange for the issuer's promise to make payments to you for a fixed time period or for the remainder of your life. Immediate annuities may appeal to you if you are searching for an income you cannot outlive.

Qualities of immediate annuities:

  • A steady stream of payments for either a fixed time frame (say 10 years) or for the rest of your life.
  • The issuer assumes total investment risk.
  • Typically, you only pay income taxes on the part of each payment that represents earnings or interest credited to your account. The remaining portion is considered a return of your investment and is not subject to taxation.
  • You give up control over the money you invest in the immediate annuity. While there are some allowances, usually you receive fixed payments with little or no variation in the amount or timing of each payment.
  • If you selected a life only payment option, you may not live long enough to receive the return of all your investment, since payments stop at your death using this option.

How does an immediate annuity work?

As the name suggests, an immediate annuity starts to pay you a stream of income right away. The amount of income you receive is based on a many factors, consisting of your age at the time of purchase, your gender, whether payments will be made to only you or to you and another person, and whether payments will be made for a fixed time period or for the remainder of your life.

What are your payment options?

Most immediate annuities consist of a several payment options that can affect the amount of the payment you acquire. The more typical payment choices are:

  • Life only. Payments are based on your age. Payments proceed until you pass away, at which time they stop.
  • Installment refund/cash refund. If you die before receiving at least the return of your investment in the immediate annuity, the named beneficiary in the policy will obtain an amount equal to the difference between what you invested and what you received. The beneficiary will get this amount in either a lump sum (cash refund) or payments (installment refund).
  • Life with a period certain. With this option, the issuer does not guarantee the return of your investment; instead, it guarantees a minimum amount of time during which payments will be made. Payments are made for the rest of your life, but if you die preceding completion of a minimum payment period (usually between 5 and 25 years), the payments will continuously be made to your beneficiary for the rest of the period, but no longer.
  • Joint and survivor. This choice provides payments for the lives of two people, usually you and your spouse. When either of you dies, payments continue to be made for the life of the survivor. You can elect to have these "survivor" payments remain the same or be reduced to a percentage of the initial payment, such as two-thirds. The joint and survivor option can also be added to the life with period certain option. For this case, the issuer will make payments until the two of you have died or for the period of time you selected, whichever is longer.
  • Period certain. This option provides a guaranteed payment for the fixed time period you indicate (e.g., 5, 10, 15, 20 years). If you die prior to the end of the chosen period, your beneficiary will still receive payments for the remainder of the fixed period.

The payment option selected affects the amount of each payment. Life only payments will be larger than payments for life with a period certain. Life with a period certain payments will be less than payments for a fixed period certain.

Example: A 60-year-old man who invests $100,000 in an immediate annuity could receive annual payments of $7,260 for the rest of his life, or $6,696 per year for life with a minimum of 20 years, or $7,920 per year if he selects payments for a fixed period of 20 years. (This example is for illustration purposes only and does not demonstrate actual insurance products or performance, nor is it meant to promote a specific company or product).

Other factors to consider:

An immediate annuity can provide a measure of relief from retirement income concerns by providing a reliable payment for the rest of your life. As with most investments, there are other factors to consider before deciding if investing in an immediate annuity is the right choice for you.

Make certain that the payment option you choose will address your income needs. If you are in poor health and have others who depend on you for financial support, selecting a life only payment option may not be appropriate because payments stop at your death, removing a valuable source of income from your survivors.

Second, if you are thinking about a life only payment option, know that it may take several years before you receive at least the return of your investment from the immediate annuity. A 70-year-old man who invests $100,000 and chooses a life only option (generating annual payments of $7,260) will need to live about 14 years to receive the return of his $100,000.

Third, consider whether there are better options for providing income. It's possible that the interest or dividend from investments such as bonds and dividend-producing stock could generate more income than you could get from an immediate annuity over the same period of time based on the same investment amount. In addition, these kinds of investments usually are more liquid than immediate annuities, providing you the opportunity to increase your withdrawals if you are in need of more money. However, an immediate annuity provides a guaranteed stream of income despite changing interest rates or investment returns. Obviously, guarantees are subject to the claims-paying ability of the annuity issuer.

Should you consider an immediate annuity?

An immediate annuity can be a helpful financial tool. You may want to consider the purchase of an immediate annuity if:

  • You want a stream of income you cannot outlive.
  • You have a sum of money that you wish to develop into a regular income source and you aren't interested in leaving the money to your heirs. If you would like to leave a portion of the money as a legacy, an immediate annuity may not be a good option.
  • You are uncomfortable with investments that have a substantial risk of loss. If subjecting your money to the risk of loss that come with investing in securities does not appeal to you, an immediate annuity may provide a way to transfer that risk to an insurance company. While the income guaranteed by the immediate annuity is subject to the claims-paying capability of the annuity issuer, the immediate annuity payments are not subject to stock market risk.
  • You expect to live for a number of years. If you're healthy and have longevity in your family, an immediate annuity may be an investment to take into consideration.

Call David Lerner Associates for more information.


Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and
cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.

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