What to Know Before You Buy an Immediate Annuity

An Immediate Annuity is a Risk Management Tool

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An immediate annuity is a tool for ensuring a regular income. It's most often used to provide consistent retirement income. Whether it's a good choice for your particular needs, however, depends upon your circumstances. Learn more about immediate annuities and how they work.

Key Takeaways

  • An immediate annuity is a tool for ensuring a regular income, most often used to provide consistent retirement income.
  • When you buy an immediate annuity, you will have to choose the type, as well as the annuity term, which determines how long your guaranteed income stream will last.
  • There are several questions you should ask yourself to determine whether an annuity is right for you.
  • Be sure you look at diversifying your annuity purchases across insurance carriers and over time.

What Is an Immediate Annuity?

An annuity is a contractual financial product issued by an insurance company. In most cases, an individual buys an annuity, the funds stay in it for a time, and then it pays out an agreed-upon amount each year.

In some cases, annuities are funded over the course of years before they start to pay out. An immediate annuity, however, is typically purchased with one lump-sum payment and then starts paying out soon after you buy it.

Imagine, for example, selling your home and putting the entire amount into an immediate annuity. You would then have an agreed-upon income for a set number of years or even for the rest of your life. You would not, however, have the option of investing or spending your money in any other way.

What Immediate Annuities Offer

Annuities are a form of insurance, and insurance is a risk management tool—not an investment. When you buy an immediate annuity, you are insuring a particular outcome, not making an investment. The outcome you are purchasing is lifetime income (or for the period you choose). The key to properly using an immediate annuity is to understand what you are insuring and how to value the benefit being provided.

When you purchase an immediate annuity, you enter into a contract with an insurance company to buy a guaranteed stream of income. The insurance company calculates the amount of monthly income they can provide based on several factors, including:

  • The type of annuity (fixed, variable, or inflation-indexed)
  • The term of the annuity that you choose (life-only, joint life, term certain)
  • Your age and gender (so they can estimate your life expectancy)

Types of Immediate Annuities

You have several choices when buying an immediate annuity. Do you want to maximize your income now or would you accept a lower payout for income that would rise with inflation? If you want the most income today, a fixed payout option is best. If you want income that goes up with inflation, you'll have to take less income now.

Do you want a fixed, guaranteed payout, or would you prefer a variable payout that has the potential to go up if markets rise? With a variable payout, the monthly amount may have a minimum guaranteed amount with a portion of the payout tied to a stock market index. Or, the entire payout amount may be based on the underlying performance of stock and bond funds.

The exact payout options vary by annuity policy, so review your options carefully before you choose.

Annuity Terms

When you buy an immediate annuity, you will have to choose the annuity term, which determines how long your guaranteed income stream will last. A term certain annuity will have an income stream that lasts for a specific number of years, while a life annuity provides guaranteed income for as long as you live.

There are also joint-life options, which pay out as long as at least one annuity owner is alive. There are also options that provide a return of principal so that if you die before the total amount you put in the product has been paid back out, any remaining balance will go to your heirs.

The older you are, the higher the monthly income you get. Insurance carriers use actuarial tables to calculate your life expectancy. The older you are, the fewer years they expect you to live. Payouts, therefore, are higher if you wait longer to buy your annuity.


Women tend to live longer than men, so payout rates on females are lower than on males.

Immediate Annuity Rates

Many annuity websites showcase immediate annuity payout rates. This is not the same as the rate of return or yield. You shouldn't use an immediate annuity payout rate or a calculated rate of return to compare it to other investments. You buy annuities for the guarantees, not for the returns. The longer you live, the higher the return the annuity will provide. You can compare an annuity rate from one company to that offered by another company, but don't compare annuity rates to other investments. That's comparing apples to oranges.

When used as part of a holistic retirement income plan, the monthly income from an immediate annuity means other capital you have can be invested for long-term growth. Over time, an immediate annuity can create more total wealth. It also creates security. Those items have value that can't be measured by strictly looking at a rate of return.

Is an Immediate Annuity Right for You?

Here are four questions you can use to decide if this product is right for you.

  1. Do you prefer safety and guarantees over riskier options?
  2. Are less than 50% of your projected retirement expenses covered by guaranteed sources of income such as Social Security and pensions?
  3. Are you healthy? Do you think there is a fair chance you may live longer than the average life expectancy?
  4. Are you concerned about over-spending early in retirement, running out of money later, or protecting your future self from poor decisions due to cognitive decline?

If you answer yes to any of the questions above, an immediate annuity may have a place in your retirement income plan. Be sure you look at diversifying your annuity purchases across insurance carriers and over time.

What If You No Longer Want the Annuity?

With most immediate annuities, you cannot change your mind once the contract is purchased. For example, if you have been receiving your stream of income for two years and suddenly change your mind, you can't cancel the income stream and get your remaining lump sum of money back.

If you decided you absolutely had to have a lump sum of money, you may be able to find an outside company to purchase your income stream from you at a discounted price.

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