Annuity Definition - Immediate Annuity

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Immediate Annuities Explained

The word 'annuity' conjures up different meanings for investors.  That's because there are various types of annuities used for various purposes.  One type of annuity is immediate annuities, the annuity definition of which is an annuity that provides an immediate flow of cash payments for life or a set number of years. Let's look at the annuity definition for immediate annuities in greater detail.

Immediate annuities can act like a second social security check because they offer a lifetime income.  If the consumer has chosen a lifetime payout, the investor typically pays a single premium to an immediate annuity company. In return, the insurance company agrees to pay the investor regular and ongoing cash payments for life, or a lesser amount if a married investor desires to continue payments over the life of both spouses (this is the annuity definition of a joint and survivor annuity). Although many investors choose to receive monthly payments, it is also possible to receive quarterly, semi-annual, or annual payments as well.

Assuming lifetime payments, the investor is provided with a lifetime income he or she cannot outlive. Such a portfolio addition is useful for investors desiring additional retirement income, for support of a community spouse in the event the other spouse is in need of nursing-home care and is seeking to qualify for Medicaid (immediate annuities can be treated as exempt asset in some states - see the annuity definition for a Medicaid annuity), for making lifetime payments to cover long term care needs, or for paying long term care insurance premiums. A portion of each immediate annuity payment is considered a return of premium and therefore not taxable to the investor. The remainder is considered interest and is subject to federal and state income taxes.  With this so far brief definition of immediate annuities, you may already begin to see some useful benefits for yourself.

Our goal is not just to provide an annuity definition of immediate annuities but also offer the pros and cons.

One drawback to these immediate annuities is the investor's early death. In such a case, the annuity company keeps the funds and the income payments end. This early-death financial risk is often regarded as a negative feature among some investors. However, there is a possible solution to this concern as some annuity companies will guarantee a return of the investment to beneficiaries in the case of a premature death.  The feature is referred to as a 'refund' provision.  Another feature offered by some companies is called commutation.  Annuity definition of commutation: allows the immediate annuity investor to change his mind and recover his initial investment less any payments already received (usually with a surrender charge). But also remember the benefit of immediate annuities – if you live to 105, the annuity company keeps paying.

Once you have immediate annuities defined in detail, many people find that some vague negative thoughts are replaced with positive inclinations.  Remember that you would never place all of your cash into an immediate annuity.  Like any investment, it should be only part of your retirement portfolio.But would it be nice to gain security with an additional lifetime income source?

Please note, that immediate annuities are long-term investments that are designed for retirement purposes. Annuity payments and any other guarantees are subject to the claims-paying ability of the issuing insurance company. For this reason, it is very important to consider the financial standing of the issuing annuity company before you purchase.  Therefore, get the safety of annuities explained before you buy.

The first time you receive an annuity definition it may be incomplete.  There are many types of annuities and in this post we have discussed only immediate annuities.

One thought on “Annuity Definition - Immediate Annuity

  1. Pat Clery says:

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