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Immediate Fixed Annuity – The Basics

An immediate annuity is a popular investment tool that allows you to turn the money you saved for retirement into retirement income through a secure way.

You pay the premium of your annuity contract to the insurance company. In return, they will provide you with a regular income for as long as you live or for a certain number of years, depending on the payout option you indicated in your annuity contract. You can choose to receive payments every month, every quarter, or every year. The immediate annuity, which is also referred to as the classic annuity, stretches the purchasing power or the value of the money that you had saved.

In insurance policies, underwriting questions are usually used by insurance companies in estimating the remaining number of years that the client still has to live. The client’s life expectancy will then be used to settle the amount of premium he/she has to pay for his/her insurance policy. The process is not the same with immediate annuities. In purchasing immediate annuities, questions about your personal health, medical history, and lifestyle, are not included. Thus, you have better odds in living longer than your life expectancy (that the insurance company estimated).

There are two basic types of immediate annuities – the variable and the fixed. Variable immediate annuities allow you to invest your money in the stock market. On the other hand, fixed immediate annuities allow you to guarantee a regular and stable source of income that can last for as long as you live no matter what happens to the economy or to the stock market. The latter type is the focus of this article.

The immediate fixed annuity may be a good option for conservative investors who do not want to risk their money in the stock market. If you cannot afford to lose your hard-earned money and if you are preparing for your retirement, this annuity could be one of the best annuity available for you.

The following are the basic features of an Immediate Fixed Annuity:

1. In non-qualified immediate fixed annuities, a portion of the monthly income is not subjected to taxation. On the other hand, income from qualified immediate annuities is subjected to taxation.

2. Unlike in other annuities in which you can give annual contributions to the insurance company until you have built up the complete cost of your contract, the premium in an immediate fixed annuity can be paid in one lump sum only.

3. It provides you with a definite regular income.

4. A long contract term will result to a lower annuity income. This is because the premium has to be stretched for several years. For example, if you want to receive income for twenty years, the income payout will be half the income you can receive if you choose to receive income for ten years only.

5. Income payout is proportional to your issuance age. Income payout is based on your life expectancy. If you are still young, (say, 40) it is assumed that you might still live for forty more years. Thus, you will receive a low-income payout because the insurance companies expect that they will give you income for forty more years. On the other hand, if you are already 60 years old, you will receive a higher income payout because your life expectancy is shorter. Note that in immediate annuities, annuity applicants should not be older than 90.

6. You can start withdrawing income from your account thirty days or a year after you have bought your annuity.

7. You can choose to receive payments for five years, ten years, fifteen years, twenty years, twenty-five years, thirty years, and for as long as you live.